PRACTICAL  RATE  MAKING 
AND  APPRAISEMENT 

BY 

WILLIAM    D.    tylARKS,  Ph.  B.,  C.  E.,  Yale  S.  1870 
Consulting  Engineer 


Whitney  Professor  of  Dynamical  Engineering,  University  of  Pennsylvania,  1877  to  1887 

Member  of  the  American  Philosophical  Society 

Honorary  Life  Member  of  the  Franklin  Institute 

Member  of  the  American  Institute  of  Electrical  Engineers 

Member  of  the  American  Gas  Institute 

Consulting  Engineer  for  Rate  Making  Purposes  to: 

New  York  City  (Gas  and  Electricity),  1905  to  1911 

Worcester  Mass.  (Electricity),  1909  to  1911 

Buffalo,  N.  Y.  (Gas),  1907 

Minneapolis,  Minn.  (Gas  and  Electricity),  1909  to  1914 

Cleveland,  Ohio  (Gas),  1910 

Des  Moines,  Iowa  (Gas),  1911 

Providence,  R.  I.  (Electricity),  1911  to  1912 

Omaha,  Nebraska  (Gas),  1912  to  1914 

Tampa,  Florida  (Water),  1912 

St.  Paul,  Minn.  (Gas),  1913 

Spokane,  Wash.  (Gas),  1913 

Accountant  and  Constructing  Engineer  for  The  Laclede  Gas  Works,  1872 

Constructing  Engineer  The  Philadelphia  Edison  Electric  Light  Co.,  1888 

President  The  Edison  Electric  Light  Company,  1892  to  1896 

Official  of  Numerous  Other  Gas  and  Electric  Works  and  Electric  Railways,  1896  to  1906 

Author  of  the  Finances  of  Gas  and  Electric  Light  and  Power  Enterprises,  1900,  and  of 
Other  Technical  Papers  and  Works 


OFFICE,  PRESIDENTS  HOUSE 
SOUTF  HA,DLEY?  MASS,  - 

Price,  $2.00  postpaid 


Copyright,   1914, 

by 
JEANNETTE  MARKS 


CONTENTS 


PAGE 


PREFACE v 

CHAPTER  I.  General  Considerations 1 

CHAPTER  II.         Report  upon  Gas  Rates  and  Prices  for  the  City 

Spokane,  1913 11 

CHAPTER  III.  Report  upon  the  Fair  and  Reasonable  Price  of 
a  6.  6  Ampere  Magnetite  Arc  Light  per  year, 
Minneapolis,  1911 60 

CHAPTER  IV.       Quantity  Rates  for  Electricity 114 

CHAPTER  V.         Methods  of  Appraisement 144 

CHAPTER  VI.        Present  Value;  Structural  Cost  of  Reproduction; 

Original  Cost;  Structural  Cost  of  Reduplication  153 

CHAPTER  VII.      Overhead  Charges 159 

CHAPTER  VIII.    Depreciation 163 

CHAPTER  IX.       Comparative    Appraising 178 

CHAPTER  X.         Market  Value;  English  Going  Value 181 

CHAPTER  XI.       Franchise  Value 184 

CHAPTER  XII.  Present  Value  of  Prospective  Profits;  Goodwill; 
Development  Expense;  Going  Value;  Intang- 
ible Values;  Options 187 

CHAPTER  XIII.    Books  and  Accounts;  Operating  Expenses  and 

Income 196 

CHAPTER  XIV.     The  Law  of  Demand  for  Electricity;  Reduction 

of  Price  Increases  Profits 200 

CHAPTER  XV.      Gas  Sales  per   capita',    Verification  of   Law   of 

Demand 215 

CHAPTER  XVI.    The    London    Sliding    Scale;    Marks'    Dividing 

Scale 227 

CHAPTER  XVII.  Capitalization,  Assets  and  Profits  of  Massachu- 
setts Gas  Companies 252 


PREFACE 

The  eager  mind  and  brain  is  learning  new  things  every  day 
and  this  fact  makes  one  hesitate  in  the  attempt  to  collate, 
digest  and  systematize  this  new  branch  of  engineering 
science,  "  Rate  making  and  appraisement  "  for  undoubtedly 
there  remains  much  of  value  to  be  originated  and  added  to  it. 

The  fact  that  the  writer  has  been  without  precedents  in 
his  work  and  has  been  obliged  to  originate  almost  all  of  it  so 
far  as  rate  making  is  concerned  makes  him  hesitate,  but  on 
the  other  hand,  the  fact  that  6,500  copies  of  his  book, 
"The  Finances  of  Gas  and  Electric  Light  and  Power  Enter- 
prises, "  have  been  sold  and  the  demand  for  it  still  continues 
urges  him  to  extend  it  by  a  work  which  is  up  to  date,  and 
which  will  enable  others  to  practically  execute  in  detail 
what  he  has  so  far  in  print  only  discussed  in  disconnected 
reports. 

The  writer  most  gratefully  acknowledges  his  indebtedness 
for  practical  data  to  the  admirable  reports  of  the  Mass- 
achusetts Gas  and  Electric  Light  Commission.  Even  in  its 
lack  of  aggressiveness  it  appears  to  have  proved  itself,  on 
the  whole,  both  safer  and  wiser  than  other  commissions. 
Its  reports  are  invaluable  for  their  lucidity  and  brevity,  as 
well  as  comprehensiveness. 

But  when  I  point  out  the  facts  that  Boston  took    the 


adjustment  of  its  gas  rates  out  of  the  hands  of  its  Gas  and 
Electric  Light  Commission,  that  the  present  (1913)  deplor- 
able condition  of  electric  rates  in  New  York  City  has  the 
approval  of  its  Public  Service  Commission,  and  that  the 
City  of  New  York  settled  its  gas  rates  before  the  appoint- 
ment of  this  commission,  and  further  that  most  of  our 
larger  cities  have  themselves  reached  fair  and  reasonable 
rates  without  state  commissions,  I  may  be  pardoned  for  my 
frank  criticism  of  partisan  public  service  commissions  as  at 
present  appointed,  and  justified  for  my  earnest  belief  that 
better  results  will  be  reached  by  a  larger  measure  of  home 
rule  in  our  metropolitan  communities. 


CHAPTER  I 
GENERAL   CONSIDERATIONS 

The  aim  of  this  work  is  to  be  entirely  practical  and  as  brief 
as  the  topic  considered  will  permit. 

To  print  all  my  reports  and  appraisements  made  for  some 
of  our  larger  cities  would  require  thousands  of  pages  and  of 
course  result  in  too  large  a  work,  but  each  selected  report 
will  be  briefly  recapitulated  and  the  cost  of  it  and  its  local 
peculiarities  mentioned. 

A  few  of  the  briefer  reports  are  printed  in  full  and  then  will 
follow  a  general  discussion  of  the  principles  involved  in 
rate  making  and  appraisement  with  practical  examples  of 
their  application. 

Such  reports  require  a  practical  technical  experience  in 
the  construction  and  operation  of  the  kind  of  works  con- 
sidered and  also  experience  in  their  business  and  methods  of 
keeping  accounts. 

The  power  to  collate,  digest,  classify  and  combine,  the 
many  factors  affecting  the  cost  of  public  utilities  involves  a 
capacity  for  the  most  laborous  drudgery  besides  a  keen 
perception  of  the  controlling  factors.  A  perfectly  fair  and 
open  attitude  of  mind  must  always  be  preserved  and  in 
matters  of  doubt  the  producing  concern  should  be  favored. 

Personally  the  author  in  making  appraisements  avoids 
any  line  of  thought  leading  to  forecasts  of  final  results  and 
adding  factor  to  factor  has  frequently  reached  unexpected 
final  results. 


2  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

No  single  set  of  figures  or  method  of  computation  should 
form  the  basis  of  an  opinion,  but  every  final  result  should  be 
checked  by  some  different  method  of  reaching  it.  Go  slow, 
check  every  step. 

It  is  not  always  necessary  or  advisable  to  include  these 
check  methods  in  a  report,  as  frequently  on  cross  examina- 
tion they  are  useful  to  the  courts  as  proving  anew  the  cor- 
rectness of  the  results  and  the  painstaking  care  given  in  a 
different  way. 

To  reach  practical  profitable  and  judicially  fair  prices  for 
a  public  utility  often  requires  difficult  and  intricate  com- 
putations even  when  an  accurate  appraisement  of  its  present 
structural  cost  of  reproduction  is  had  and  the  present  value 
of  the  plant  has  been  learned  from  it  by  the  deduction  of 
past  depreciation. 

In  considering  the  appraisement  of  the  present  value  of 
works  we  again  must  subdivide  it  into  used  and  useful  and 
not  required  land,  buildings  and  apparatus.  For  instance, 
owing  to  the  introduction  of  natural  gas  into  Cleveland  and 
Buffalo  about  one  fourth  only  of  the  original  artificial  gas 
works  were  used  and  useful. 

In  Omaha  ten  per  cent  of  the  gas  works  sales  were  outside 
of  the  City  limits  and  the  present  value  of  the  gas  works  had 
to  be  pro-rated. 

Not  infrequently  the  public  utility's  capacity  far  exceeds 
its  present  sales  and  the  useful  though  unused  present  value 
of  the  works  must  he  reduced  pro-rata  to  be  fair  to  con- 
sumers, who  rightfully  ought  not  to  be  forced  to  carry  the 
cost  of  future  extensions  until  they  are  needed,  or  to  pay  for 
over-built  works. 

To  attempt  to  fix  an  invariable  basis  for  future  prices 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  6 

without  also  being  able  to  fix  the  future  prices  of  raw  material 
and  productive  labor  will  surely  lead  to  injustice  to  a  public 
utility  or  to  its  consumers. 

To  attempt  to  fix  future  prices  for  a  term  of  years  and  then 
subject  them  to  revision  is  a  better  plan  for  natural  monopo- 
lies such  as  public  utilities. 

But  this  plan  has  not  always  produced  good  results,  for 
the  commissions  or  Courts  entrusted  with  this  revision 
usually  have  not  the  intimate  knowledge  of  details  required 
to  prevent  them  from  falling  into  pitfalls  (often  intentionally 
prepared)  and  therefore  rendering  absurd  decisions.  (See 
Dubuque  Waterworks  Arbitration  1899.) 

After  a  prolonged  experience  with  and  consideration  of  the 
records  and  reports  of  the  Interstate,  the  Massachusetts, 
New  York,  Wisconsin  and  other  public  service  commissions, 
I  am  convinced  that  until  political  partisanship  can  be 
completely  eliminated  from  consideration  in  the  appoint- 
ment of  national  and  state  commissioners  it  will  be  wiser  to 
confine  these  commissions  if  appointed  to  the  publication 
only  of  the  reports  of  the  operations  of  public  utilities  and 
that  better  results  will  be  obtained  for  the  public  by  so  doing. 
For  with  pitiless  publicity  promptly  furnished  there  is 
sufficient  ability  and  fairness  to  be  found  in  every  community 
to  cause  rates  to  be  fairly  adjusted  at  home,  with  the  aid  of 
the  Courts  if  necessary.  A  municipality  knows  best  its  own 
needs  and  limitations  and  how  to  deal  with  them. 

It  is  rarely  that  a  public  service  commissioner  has  had  any 
technical  training  or  experience.  The  consequence  is  that 
they  blunder  in  technical  reports  or  as  an  alternative  avoid 
as  much  as  possible  an  exhaustive  examination  of  public 
utilities. 


4  PRACTICAL  KATE  MAKING  AND  APPRAISEMENT 

The  English  deal  with  these  matters  of  public  utilities 
far  more  wisely  than  we  do,  for  each  public  utility  requiring 
legislation  is  met  by  a  special  parliamentary  committee 
(assisted  by  a  guild  of  engineering  experts  and  accountants) 
who  after  making  an  exhaustive  examination  fix  the  rates 
and  so  they  have  reached  an  almost  Utopian  relation  with 
their  public  utilities. 

To  demand  of  an  expert  superhuman  impartiality  is  to 
ask  the  impossible,  but  a  consulting  engineer  must  bear  in 
mind  that  under  proper  cross  examination  predjudiced  views 
or  results  in  scientific  matters  cannot  possibly  be  sustained. 

Further  when  an  expert  has  once  given  his  figures  it  is  too 
late  to  change  them  or  to  substitute  an  alternative  set  of 
figures. 

There  is  but  one  right  way  and  a  thousand  wrong  ways  of 
making  a  report  on  rates.  Extreme  caution  in  every  step 
is  required. 

The  technical  expert  has  not  the  latitude  of  a  lawyer  in 
his  work — he  must  decide  upon  the  one  right  method  and 
then  correctly  compute  his  results  and  prove  them. 

In  1910  the  Census  reports  225  cities  in  this  United  States 
as  having  over  25,000  population.  The  public  service 
utilities  serving  these  cities  are  large  natural  monopolies, 
and  hence  not  subjected  to  the  healthy  corrective  of  com- 
petition in  their  rates  for  electricity,  gas,  water  and 
transportation. 

There  are  also  many  hundred  of  cities  having  less  than 
25,000  population  and  public  utilities,  but  the  probability  of 
extortionate  prices  in  these  smaller  cities,  towns  and  villages 
appears  to  be  less  because  the  public  utilities  there  are 
small  and  render  a  service  as  a  servant  of  the  public  often  at 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  5 

a  loss,  instead  of  growing  into  vendors  of  a  commodity  on 
a  large  scale,  which  much  reduces  its  costs  per  unit. 

A  legislative  body  granting  such  a  virtual  monopoly  as  a 
franchise  to  a  pubic  utility  has  not  done  its  whole  duty 
either  to  the  public  served,  or  to  the  public  utility  serving, 
until  it  has  established  fair  and  reasonable  rates  for  the 
particular  utility  concerned. 

No  concern,  no  public  utility  is  of  any  ultimate  value  to 
its  community  unless  it  makes  an  honest  profit,  but  the 
growth  of  any  community  is  seriously  retarded  by  hap- 
hazard or  extortionate  rates,  for  public  utility  monopolies. 

Careful  and  laborious  studies  involving  years  of  labor 
have  convinced  me  of  the  blind  regularity  with  which  com- 
munities respond  to  rates.  Altough  the  action  of  any 
individual  can  rarely  be  predicted,  the  action  of  a  com- 
munity can  be  relied  upon  with  certainty.  It  is  as  sure  as 
the  law  of  gravity. 

When  a  City  exceeds  75,000  population  (and  particularly 
when  located  as  a  metropolis)  the  habits  of  its  citizens  change 
so  that  the  demand  for  public  utilities  per  capita  increases 
markedly. 

In  recent  years,  in  a  number  of  cases,  a  reasonable  reduc- 
tion of  rates  forced  upon  a  public  utility  in  spite  of  its  urgent 
protestation  of  resulting  ruin,  and  often  of  its  vigorous  and 
prolonged  defence  in  the  courts,  has  resulted  in  such  an 
increase  of  its  total  profit  as  has  caused  the  public  utility 
itself  to  express  its  satisfaction  with  the  rate  fixed  at  the  end 
of  a  year.  The  Consolidated  Gas  Co.  of  N.  Y.  is  a  famous 
instance  of  this.  This  is  usually  due  to  three  points  over- 
looked by  its  managers. 

Not  only  is  a  larger  quantity  sold  at  a  smaller  profit  per 


b  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

unit,  but  also  the  investment  required  per  unit  sold  is  largely 
reduced.  Besides  this  so  very  large  a  proportion  of  the 
operating  expenses  of  a  public  utility  are  independent  of  the 
amount  of  sales  and  dependent  wholly  on  the  passage  of 
time,  that  the  operating  costs  per  unit  are  largely  reduced 
by  increased  sales,  per  year. 

On  the  other  hand  utility  rates  are  sometimes  fixed  so  low 
in  cities  which  have  not  grown  to  metropolitan  populations 
as  not  to  yield  a  fair  and  adequate  profit  to  a  public  utility. 

When  we  consider  the  sales  per  capita  of  a  public  utility 
we  are  forced  to  recognize  a  point  of  satiation  for  each  price 
fixed  in  any  community,  and  if  this  community  is  not  large 
enough  to  return  a  total  more  than  covering  the  time  expenses 
(which  are  independent  of  the  amount  of  sales)  and  the 
commodity  costs,  there  is  an  incurable  deficit  at  the  rate 
fixed.  Common  justice  requires  that  a  proper  higher  rate  be 
computed  and  allowed  to  unprofitable  utilities  if  a  loss  is  due 
to  rates. 

This  point  of  satiation  per  capita  for  a  given  price  varies 
with  the  population  and  characteristics  of  a  community. 
Although  the  population  is  the  controlling  factor  still  there 
are  other  and  often  obscure  causes  of  variation  requiring 
careful  research  before  reaching  a  correct  result,  in  in- 
dividual cases. 

These  statements  apply  with  equal  force  to  gas,  electricity, 
transportation,  and  water  if  it  is  metered. 

The  profit  to  a  public  utility  can  always  be  assured  by 
the  use  of  meters  and  a  correct  uniform  rate  to  both  large 
and  small  consumers,  but  such  a  method  (flat  rates)  is  unjust 
to  the  large  consumers  and  prevents  the  growth  of  the  utility, 
because  the  small  cusumer  receives  a  service,  whose  cost  is 


PRACTICAL  BATE  MAKING  AND  APPRAISEMENT  7 

principally  due  to  time  charges  proportional  to  his  greatest 
possible  demand,  and  the  large  consumer  often  costing  the 
same  or  but  little  more  for  time  charges,  pays  the  same  rate 
per  unit  for  a  large  amount  of  a  commodity  whose  pro- 
portional operating  commodity  cost  per  unit  is  usually  very 
small. 

Thus  we  see  for  metered  consumers : 

The  consumer  whose  demand  is  small  usually  costs  high 
for  service  and  requires  very  little  of  the  commodity  de- 
livered. 

The  consumer  whose  demand  is  large,  usually  costs  but 
little  more  for  his  service  and  requires  a  great  deal  of  the 
commodity  delivered.  A  meter  measures  only  the  com- 
modity. 

The  proportional  cost  of  the  commodity  varies  principally 
with  the  productive  labor  and  raw  material  consumed  in  its 
delivery. 

The  time  costs  of  a  plant  consist  principally  of  the  interest 
(or  profit)  depreciation,  rent,  insurance,  salaries  of  its  staff 
of  unproductive  accounting,  and  managing  employes,  and 
other  expenses  not  rising  and  falling  with  the  volume  of  its 
commodity  delivered,  but  necessary  to  the  proper  operation 
of  the  plant  when  placed  at  the  service  of  its  consumers. 

The  exact  fair  and  reasonable  rate  to  be  paid  by  each 
consumer  to  a  public  utility  must  therefore  be  a  properly 
apportioned  amount  as  follows: 

For  the  service  his  proportion  of  the  time  costs. 

For  the  commodity,  his  proportion  of  the  commodity 
costs. 

The  results  of  these  computations  based  on  the  above 


8  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

statements  have  been  variously  called  " sliding  scales" 
" stepped  rates"  and  "differential  rates". 

While  a  community  which  has  become  accustomed  to 
paying  to  paying  so  much  a  yard,  or  so  much  a  pound  for 
its  commodities  may  prefer  a  like  uniform  rate  for  public 
utilities,  still  it  must  be  obvious,  after  a  little  thought,  that 
the  large  purchaser  always  pays  too  high  a  price  for  his 
commodiites,  whatever  they  may  be,  if  he  pays  a  uniform 
rate  regardless  of  quantity. 

The  uniform  rate  has  the  popular  advantage  of  great 
simplicity  and  apparent  justice,  and  so  persists  in  use  in  the 
majority  of  public  utilities. 

If  the  public  utilities  will  make  a  proper  distinction 
between  their  consumers  requiring  service  and  a  small 
quantity  of  their  commodity  only  for  luxury  and  con- 
venience, and  those  requiring  their  commodity  in  large 
quantities  for  industrial  uses,  they  will  largely  increase  their 
own  business  and  also  increase  the  commercial  growth  of 
any  community  which  they  may  serve. 

It  was  the  realization  of  this  fact  by  the  writer  after  much 
study  of  the  operating  expenses  of  the  Philadelphia  Edison 
Electric  Light  Company,  that  made  him  finally  put  in 
operation  in  1890  a  stepped  rate  for  electricity  (given  on 
page  251  of  the  Finances  of  Gas  and  Electric  Light  and 
Power  Enterprises)  in  the  year  1891,  after  a  successful  trial 
of  it  for  over  one  year.  (See  Journal  Edison  111.  Association, 
1891). 

This  scientific  and  rational  scale  of  prices  proved  very 
profitable  to  the  Company  for  the  ensuing  four  years.  (See 
Edison's  letter  June  4,  1892,  page  260,  Finances  of  Gas  and 
Electric  Light  and  Power  Enterprises)  when  the  writer 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  9 

was  obliged  to  relinquish  his  position  as  president  rather 
than  become  an  accomplice  in  the  issuance  of  watered 
securities  by  a  group  of  colossal  thieves  in  control  of  the 
company. 

The  accounts  of  the  operating  management  of  a  public 
utility  must  have  very  close  scrutiny  from  one  attempting 
to  fix  fair  and  reasonable  rates  for  it,  particularly  in  dis- 
tinguishing between  necessary  operating  expenses,  (without 
which  the  utility  company  could  not  produce  its  commodity) 
and  deductions  from  income  often  made  as  a  matter  of 
policy  or  because  of  bad  management,  such  as  contributions 
of  a  political  or  charitable  nature,  unnecessary  salaries, 
bad  debts,  excessive  advertising,  etc.,  etc. 

These  items  are  often  presented  in  the  endeavor  to  swell 
the  apparent  cost  of  a  commodity. 

In  a  number  of  instances  also  the  attempt  has  been  made 
to  include  interest  on  borrowed  money,  either  on  a  floating 
debt  or  on  a  mortgage,  in  the  costs,  but  it  must  be  obvious, 
that  if  a  concern  has  not  sufficient  capital  to  transact  its 
business,  it  should  pay  its  interest  on  its  borrowed  money 
out  of  its  own  profits. 

When  we  come  to  the  appraisement  of  a  public  utility, 
it  is  necessary  to  distinguish  carefully  between  used  and 
useful  assets,  and  assets  not  required  for  the  production  of 
its  commodity. 

As  for  book  assets  the  Interstate  Commerce  Commission 
makes  the  following  statement  as  to  the  deceptiveness  of 
these  records  in  its  report  of  December  24,  1908.  "Every 
balance  sheet  begins  with  the  cost  of  property  against  which 
is  set  a  figure  which  purports  to  stand  for  investment.  It 
is  sufficient  to  refer  to  the  well  known  fact,  that  no  court  or 


10  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

commission  or  accountant  or  financial  writer  would  for  a 
moment  consider  that  the  present  balance  sheet  statement 
purporting  to  give  the  cost  of  property,  suggests  even  in  a 
remote  degree  a  reliable  measure,  either  of  money  invested 
or  of  present  value." 

This  wholesale  scathing  criticism  of  the  accounts  of  the 
public  service  corporations  of  the  United  States  with  which 
it  is  concerned  should  be  sufficient  to  prove  that  the  utmost 
caution  and  thorough  research  must  be  exercised  by  an 
appraiser,  and  that  an  appraisement  must  be  made  regard- 
less of  book  values,  in  most  instances. 

It  is  by  adding  to  a  fair  and  reasonable  profit  upon  the 
appraisement  of  any  property,  the  necessary  operating 
costs  of  it,  that  a  correct  basis  for  rates  is  reached. 


CHAPTER  II. 

RECAPITULATION     OF     REPORT    UPON    GAS    RATES     AND 
PRICES  FOR   THE   CITY   OF   SPOKANE 

This  report  was  for  the  purpose  of  fixing  fair  and  reasonable 
rates  for  gas  upon  the  complaint  of  the  citizens  of  Spokane 
that  $1.50  uniform  rate  per  1,000  cu.  ft.  was  extortionate. 

The  uniform  reasonable  rate  recommended  was  $1.20 
per  1,000  cu.  ft.  with  a  minimum  charge  of  25c.  per  meter 
per  month  as  sufficient  to  protect  the  Gas  Company. 

As  a  fairer  method  between  consumers  a  stepped  rate  as 
follows  was  recommended. 

A  net  rate  of  $1.40  per  1,000  cu.  ft.  for  the  first  1,000 
cu.  ft.  per  meter  per  month. 

And  a  net  rate  of  $1.00  per  1,000  cu.  ft.  for  all  excess  over 
1,000  cu.  ft.  per  meter  per  month. 

The  appraisement  of  the  works  made  by  the  engineers  to 
the  Washington  State  Public  Service  Commission  is  said  to 
have  required  the  services  of  three  or  four  engineers  for  about 
six  months  and  was  furnished  to  city. 

An  abstract  of  the  book  accounts  was  furnished  to  city 
by  the  Spokane  Gas  and  Fuel  Company. 

The  following  report  occupied  about  thirty  days,  required 
one  assistant  and  cost  the  City  of  Spokane  about  $2,100  for 
travelling  expenses  subsistence,  and  services  before  the 
State  Commission.  This  gas  company  is  an  excellent  ex- 
ample of  stock  watering  and  manipulation  and  its  results. 


12  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

TABLE  OF  CONTENTS 

SECTION  1.    Object  of  this  Report. 

SECTION  2.    Land. 

SECTION  3.    Cost  of  Reproduction  of  New  Plant. 

SECTION  3.    Works  Equipment. 

SECTION  4.    Yard  Equipment. 

SECTION  5.    Holders: 

Street  Mains,  Tabulation. 
SECTION  6.    Service  Pipe  Connections. 
SECTION  7.    Gas  Meters  Installed. 
SECTION  8.    Gas  Meters  in  Stock. 
SECTION  9.    Governors  and  Regulators. 
SECTION  10.  Gas  Arc  Lights. 
SECTION  11.  Teams  and  Vehicles. 
SECTION  12.  Depreciation. 
SECTION  13.  Overhead  Charges. 

SECTION  14.  The  Present  Value  of  the  Spokane  Gas  Plant. 
SECTION  15.  The  Operating  Expenses. 
SECTION  16.  Manufacturing  Cost. 
SECTION  17.  Distributing  Cost. 
SECTION  18.  Commercial  Super,  and  Expenditures. 
SECTION  19.  General  Office  Expense  and  Administration. 
SECTION  20.  Estimate  of  the  Proper  Cost  of  Gas. 
SECTION  21.  Allowance  for  New  Business. 
SECTION  22.  Comparisons  with  Tacoma  and  Seattle  Gas. 
SECTION  23.  Profit  and  Depreciation,  Cost  per  1000  cu.  ft. 
SECTION  24.  Flat  Rate  Price  for  Gas. 
SECTION  25.  Stepped  Rate  Prices  for  Gas. 

Diagram  2  of  Step  Rate  System. 

Step  Rate  System  Proposed. 

SECTION  26.  Finances  of  Spokane  Gas  and  Fuel  Company. 
SECTION  27.  Increased  Sales  Due  to  Lowered  Price  of  Gas. 
SECTION  28.  Qualities  of  Gas  Required. 
SECTION  29.  The  London  Sliding  Scale  for  Gas. 
SECTION  30.  Recapitulation . 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  13 

REPORT  UPON  GAS  RATES  AND  PRICES  FOR  THE  CITY 
OF  SPOKANE,  WASHINGTON 

BY  WILLIAM  D.   MARKS,  Consulting  Engineer 
Park  Row  Building,  New  York  City. 

SECTION  1. — OBJECT  OF  THIS  REPORT. 

The  object  of  this  report  is  to  obtain  from  the  data  of  the 
Spokane  Gas  and  Fuel  Company  as  furnished  by  the  engi- 
neering corps  of  the  State  Public  Service  Commission  and  by 
the  Spokane  Gas  and  Fuel  Company  three  systems  of  rates : 

1.  A  uniform  Flat  Rate  price  applicable  as  a  straight 
charge  without  any  addition  of  any  kind  for  the  gas  con- 
sumed at  each  meter. 

2.  To  obtain  a  stepped  rate,  often  called  a  "  Differential 
Rate/'  which  has  different  prices  charged  for  successive 
amounts  as  measured  by  each  meter. 

3.  To  apply  the  London  Sliding  Scale  to  the  conditions 
existing  in  Spokane  and  from  the  data  obtained  to  fix  a 
standard  price  and  a  standard  rate  of  dividend  (or  interest) 
and  also  to  fix  the  reduction  of  the  price  of  gas  which  shall 
entitle  the  Gas  Company  to  raise  its  dividend  one  per  cent. 

I  have  been  furnished  with  the  itemized  appraisement  of 
the  gas  plant  as  made  by  the  engineers  of  the  Washington 
Public  Service  Commission  and  have  used  the  same  for  the 
purpose  of  adding  an  overhead  charge  and  deducting  ac- 
crued depreciation. 

The  land  upon  which  the  gas  works  is  situated  has  been 
appraised  by  Messrs.  Fred  E.  Baldwin  and  S.  E.  Hege  and 
I  have  used  the  higher  valuation  of  $109,402.99,  given  as 


14  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

the  value  of  the  land,  for  the  purpose  of  gas  making  adding 
121A%  thereto. 

No  buildings  or  structures  of  any  kind  are  included  in 
this  valuation  of  land. 

The  operating  expenses  for  the  year  1912  have  been  fur- 
nished by  the  officials  of  the  Spokane  Gas  and  Fuel  Company. 
As  sufficient  time  and  assistance  to  audit  the  books,  examine 
the  vouchers  and  check  stubs  and  for  recomputing  has  not 
been  granted,  I  have  accepted  for  investigation  the  various 
figures,  footings  and  segregations  used  in  the  method  of 
bookkeeping  of  the  Spokane  Gas  and  Fuel  Company  and 
collated  and  arranged  them  in  a  simplified  form. 

From  these  results  I  have  formed  an  opinion  and  submit 
for  your  consideration  the  various  expurgations  required 
to  compute  the  cost  of  gas  on  the  basis  of  the  ordinary 
organization  and  expenditure  of  conservative  gas  companies. 

Should  the  figures  of  the  appraisement  or  the  figures  de- 
rived from  the  books  be  altered  by  a  more  thorough  and 
detailed  examination  it  may  result  in  a  change  in  the  com- 
puted price  of  gas,  but  the  methods  used  need  not  be  changed. 

In  fixing  the  price  of  gas  it  would  be  as  impossible  as  it 
would  be  insincere  to  claim  scientific  accuracy,  but  I  believe 
my  results  to  be  commercially  adequate  to  the  protection 
of  the  Gas  Company  in  a  fair  and  reasonable  return  upon  its 
true  investment  and  its  proper  operating  cost,  being  as  close 
as  it  is  possible  to  obtain  them  in  the  operation  of  gas 
works. 

I  am  indebted  to  the  courtesy  and  prompt  assistance  of 
both  the  engineers  of  the  Public  Service  Commission  and  of 
the  officials  of  the  Spokane  Gas  and  Fuel  Company  for  the 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  15 

prompt  rendering  of  whatever  assistance  and  information 
I  have  asked  of  them. 

SECTION  2.  —  LAND. 

The  land  occupied  by  the  Spokane  Gas  and  Fuel  Company 
and  the  Spokane  Falls  Gas  Light  Company  has  at  the  re- 
quest of  Commissioner  Fassett  been  valued  by  the  real 
estate  experts,  F.  E.  Baldwin  and  S.  E.  Hege,  as  follows: 


Tract  occupied  by  gas  works,  Erie  and 
St 


F.  E  Baldwin    S.  E.  Hege 


Bradley  Streets,  107,338  sq.  ft  ........          $53,669  .  16     $64,402  .  99 

Railroad  Avenue  between  Stevens  and 
Washington  Streets  .................  50,000  .  00       45,000  .  00 

Totals  ..........................        $103,669.16    $109,402.99 

SECTION  3.  —  PUBLIC  SERVICE  ENGINEERS.  COST  OF  RE- 
PRODUCTION OF  NEW  PLANT,  SPOKANE  GAS  &  FUEL 
COMPANY  AND  SPOKANE  FALLS  GAS  LIGHT  COMPANY 

WORKS  EQUIPMENT 
October  1st,  1912. 

8  Main    buildings,    manufacturing 

plant  ......................  $45,759.00 

9  Shops   and   miscellaneous   struc- 

tures .......................    13,784.00 

-  $59,543.00 
16  Coal  gas  benches  (2  stacks)  ........................ 

1  Standard  9  foot  Lowe  Water  Gas  Set  ......  74,560.00 

2  P.  &  A.  tar  extractors,  1  purifier  set  .......  10,465.00 

4  Condensers,  3  scrubbers  and  1  wash  box  ....  20,559  .  00 

2  7  ft.  station  meters  ......................  4,700.00 

4  Boilers  (455  H.P.)  and  1  feed  water  heater...  7,192.00 


Forward,  $177,019.00 


16  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Brought  Forward,  $177,019.00 

2  Electric  generators  35  and  25  K.W 3,647.00 

3  Compressors,  complete  erected 4,818 . 00 

3  Blowers,  complete  erected 2,667 . 00 

3  Exhausters,  complete  erected 4,011.00 

2  Governors,  complete  erected 820 . 00 

1  Stroh  &  Caius  ammonia  concentrator 1,500.00 

1  Fairbanks  gas  engine  4^  H.P 240.00 

10  Pumps,  erected 1,030.00 

2  Regulators 205.00 

1  De  Brower  coal  projector 3,076.00 

2  Coke  pushers  (Williams) 3,100.00 

1  Coke  crusher,  rolls  and  engine 719.00 

1  Coal  conveyor  and  crusher  complete 8,465 . 00 

$211,317.00 
SECTION  4. — YARD  EQUIPMENT. 

1  Tar  well  in  yard $1,320.00 

1  Water  tank  and  tower ....  525 . 00 
3  Ammonia  storage  tanks . .  .  1,500 . 00 

2  Oil'storage  tanks 2,710.00 

1  Brick  ammonia  well 1,038.00 

2  Tar  separators 160.00 

1  Receiver  tank  for  gas  ....  750 . 00 

1  Receiver  tank  for  air 90 . 00 

1  Derrick  crane 695.00 

1  Hunt  Industrial  Railway. .  5,000 . 00 

1  Hose  reel  and  hose 130.00 

2  Platform  Fairbanks  Scales          454.00 
1  Craig-Ridgway  Steam  Hyd. 

Elev 1,600.00 

32  Coke  quenching  hoppers .  .  2,464 . 00 
Coal  bunkers  and  crusher 

house 6,422.00 

Coke  trestle 2,380.00 

Forward,      $27,238.00 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  17 

Brought  Forward,     $27,238 . 00 

Elevator  Runway 311 .00 

Coal  elevator,  boiler  house  505.00 

8  Coal  hoppers 3,080.00 

8  Coal  hoppers 2,320.00 

Yard  Paving 1,035.00 

Seal 's  sumps  and  drip  pots  500 . 00 

$34,989.00 

Plant  piping  and  fittings 9,317.00 

All  tools  and  implements 2,405 . 00 

All  testing  apparatus 1,670.00 

All  furniture  and  fixtures 15,634.00 


Total  valuation  manufacturing  plant  (new).  $275,332.00 

SECTION  5. — HOLDERS. 

3  Gas  Holders 

1  Two  lift     110,000  cu.  ft,  capacity $17,500.00 

1  Single  lift    50,000      «               «      15,950.00 

1  Three  lift  305,000      "               "      36,000.00 


Cost  new      465,000      "  "      $69,450.00 

Average  per  1000  cu.  ft.  capacity,  about  $149.00. 


18  PRACTICAL    RATE    MAKING    AND   APPRAISEMENT 

00* 


£ 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  19 

Recapitulating  the  above  tabulation  of  mains  we  have : 

Cast  iron  street  mains  21,520  ft $17,366 . 00 

Black  merchant  street  mains  402,377  "   220,145.00 

Black  line  «         "       175,847  "   65,846.00 

Kalamein  «         "         67,080  «   47,282.00 


Total  666,824" $350,639.00 

Undistributed  extras .  .  7,426 . 00 


Total..  $358,065.00 


SECTION  6. — SERVICE  PIPE  CONNECTIONS. 

Service  connections  complete       7,441 $105,920.00 

Less  amount  paid  by  consumers            53,000.00 

Stub  services                                  2,166 17,099 . 00 


Total  the  property  of  company    9,607 $70,019.00 


SECTION  7. — GAS  METERS  INSTALLED. 

Ordinary 

3  Light  (meter  lights   7,629)  2,543 $16,275.00 

5      «      (     «         «       29,835)5,967 43,261.00 

10      «      (     «         «        4,130)     413 3,816.00 

20      "     (     "         «         1,500)       75 1,030.00 

30      ".-.(•         "         2,370)       79 1,537.00 

45       «      (     «         «            405)         9 228.00 

60       "      (     "         "         1,020)       17 644.00 

100       •-'(•-.-•         "            100)         1 64.00 

Prepay 

3  Light  (meter  lights    1,371)     457 4,469.00 

5      «     (     «         «         1,625)     325 3,650.00 

10       «      (     "         "            120)       12 159.00 

20       "      (     u         "             40)         2 34.00 

50,145    9,900.  .  $75,167.00 


20          PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

SECTION  8. — GAS  METERS  IN  STOCK. 

Ordinary 

3  Light      1,167 $6,127.00 

5       «            277 1,676.00 

10       «             182 1,438.00 

20       «              15 178.00 

30       "                8 138.00 

45       "                1 22.00 

60       "                3 103.00 

200       «                1 112. QO 

Prepay 

3  Lights         82 708.00 

5       "              44 440.00 

10       "  28..  335.00 


Total  in  stock  1,808  $11,277.00 

SECTION  9. — GOVERNORS  AND  REGULATORS. 

Three  3  in.  district  station  governors $737 . 00 

938  Reynold's  Service  Regulators  No.  1 6,003.00 

104         «                 «               «             «     2..  744.00 


Total $7,484.00 

SECTION  10. — GAS  ARC  LIGHTS,  ETC. 

1345  gas  arcs $12,806.00 

Small  lights  and  heating  appliances 2,689 . 00 

Total  rental  equipment $15,495.00 

SECTION  11. — TEAMS  AND  VEHICLES  FOR  STREET  SERVICE. 

11  Horses $2,550.00 

13  Wagons  and  harnesses 2,105.00 

5  Motor  cycles 1,025 . 00 

2  Automobiles 2,530.00 

3  Bicycles 128.00 

Total.  .  $8,338.00 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          21 

SECTION  12. — DEPRECIATION. 

Depreciation  arises  from  physical  decay,  inadequacy 
and  obsolescence.  Depreciation  is  cured  by  repairs  and 
renewals.  The  more  thorough  the  repairs  the  less  the 
residual  depreciation  remaining.  But  there  is  always  a 
residual  depreciation  no  matter  how  thorough  the  repairs. 
Residual  depreciation  is  like  the  failing  of  an  ageing  man. 
No  matter  how  good  his  present  condition  each  year  brings 
his  end  nearer.  So  it  is  with  manufacturing  plants. 

After  years  of  practical  trial  the  Massachusetts  Gas  and 
Electric  Light  Commission  has  fixed  3  per  cent  as~a  fair 
average  allowance  for  annual  residual  depreciation  of 
municipal  gas  and  electric  works  for  cases  where  the  repairs 
have  been  as  thorough  as  possible. 

In  the  case  of  the  Spokane  Gas  Works,  the  quality  of  the 
buildings  and  machinery  and  the  present  condition  of  them 
is  very  good. 

I  am  advised  that  the  present  buildings  and  machinery 
have  been  built  about  seven  (7)  years,  which  makes  the 
average  accrued  residual  depreciation  21  per  cent.  This  will 
be  very  low  for  the  wrought  iron  street  mains. 

SECTION  13. — OVERHEAD  CHARGES. 

In  considering  the  overhead  charges  on  an  inventory  of 
a  completed  works  it  must  be  recollected  that  all  of  its  items 
are  included  in  the  inventory  if  the  work  is  thoroughly  done 
and  therefore  no  allowance  is  required  for  "omissions," 
etc.  also  that  such  items  as  "bond  discount,"  etc.,  relating 
to  the  Company's  method  of  borrowing  money,  instead  of 
furnishing  it  from  the  sales  of  its  stock  to  its  own  stock- 
holders, is  outside  of  the  province  of  an  appraiser. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Since  two  summers  or  eighteen  months  should  suffice 
for  the  complete  erection  of  these  works  and  the  laying  down 
of  its  street  system  of  mains,  etc.,  we  are  justified  in  an 
estimate  for  interest  of  nine  (9)  months  average  at  6  per 
cent  or  4}/£  per  cent  of  its  new  cost.  Two  (2)  per  cent  will 
provide  the  drawings  and  engineering  supervision  required. 
Since  taxes  are  rarely  assessed  upon  buildings  in  course  of 
constructions,  but  only  on  the  land,  2  per  cent  has  been 
found  to  more  than  provide  for  them  in  most  cases. 

The  expenses  of  "organization"  are  a  very  uncertain 
quantity,  and  often  are  little  or  nothing,  but  to  be  on  the 
safe  side  they  are  assumed  at  twice  the  cost  of  engineering 
drawings  and  supervision,  or  four  (4)  per  cent. 

Recapitulating,  we  have  for 

Overhead  Charges 

Interest 4 . 5% 

Engineering  drawings  and  supervision 2 . 0% 

Taxes 2.0% 

Organizing 4 . 0% 


Total 12.5% 

The  Wisconsin  State  Railroad  Commission  in  some  cases 
has  fixed  12  per  cent  for  this,  after  elaborate  research. 

SECTION  14. — PRESENT  VALUE  OF  THE  SPOKANE  GAS  PLANT. 

The  structural  cost  (new)  of  the  various  items  of  the 
Spokane  Gas  Plant  is  given  as  related  above  from  the 
appraisement  of  the  State  Public  Service  Engineers,  but  in 
being  brought  together  these  items,  as  a  connected  whole, 
ready  to  operate,  should  have  added  to  them  12J^  per  cent 
and  then  be  depreciated  on  the  basis  of  years  of  usefulness, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  23 

save  in  the  case  of  land,  which  is  not  depreciated,  the  land's 
present  value  being  determined  for  the  purpose  of  gas  making 
by  competent  local  real  estate  experts  and  12J^  per  cent 
being  added  to  this  amount,  to  obtain  the  total  structural 
cost  of  the  plant  ready  to  operate  and  connected  up.  If 
now  from  the  total  structural  cost  of  the  plant  (new  at 
present  prices)  we  subtract  the  depreciation  we  obtain  its 
present  value  as  a  basis  for  the  computation  of  future  profit 
and  depreciation,  and  thence  the  proper  price  of  gas  by 
adding  profit  and  depreciation  to  the  cash  operating  cost 
of  gas  making  and  delivering. 

Recapitulating  for  October  1st,  1912 

Works  equipment  —  manufacturing  ...........  $275,332  .  00 

Gas  holders  ...............................  69,450.00 

Street  distribution  system  ...................  358,065.00 

Service  pipe  connections  ....................  70,019.00 

Gas  meters  installed  ........................  75,167.00 

Gas  meters  in  stock  ........................  11,277.00 

Gas  arc  light  ..............................  15,495.00 

Teams  and  vehicles  ........................  8,338.00 

Governors  and  regulators  .......  .  ...........  7,484  .  00 

Total  as  per  Public  Service  Commission.  .  .....  $890,627.00 

Overhead  charge,  12J^  per  cent  ......  :  .......    111,328.00 


Total  structural  cost  (present  prices)  .........  $1,001,955.00 

Residual  depreciation,  21  per  cent  ...........    210,411.00 

Present  value  (land  omitted)  ................  791,544.00 

Land,  present  value  ....................  ____  109,403  .  00 

Land,  12J/2  per  cent  overhead  charge  .........  13,675.00 

Working  capital,  193,110  M  at  13c  ...........  25,104.00 


Total  present  investment  value $939,726 . 00 


24          PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

SECTION  15. — THE  OPERATING  EXPENSES  AS  PER  COMPANY'S 
BOOKS. 

Tabulated  Operating  Expenses,  Spokane  Gas  &  Fuel  Co.  1912. 

Total  Gas  Sales,— 193,109,700  cu.  ft. 

Operating  expenses     Per  1000 

Items  cu.  ft. 

Fixed         Proportional      Sales 

(1)  Coal     carbonized,     20,739.9 

tons  at  $5.28 $109,345.99      56.62c. 

(2)  Fuel  under  retorts,  4,125.7 

tons  at  $3.67 15,141 .27        7 . 84c. 

(3)  Generator  fuel,  427.34  tons 

at  $3.67 1,568.35        O.Slc. 

(4)  Boiler  fuel,   coal 

gas $13,549.92   

Labor  and  misc. 
water  gas 601.96   14,151.88        7.33c. 


(5)  Gas  oil,  54,218  gals,  at  4.455c 2,415 .89        1 . 25c. 

(6)  Superintendence 

coal  gas $2,558 .84   

Superintendence 
water  gas 173.85       $2,732.69 1.42c. 

(7)  Labor  mfg.  coal 

gas $16,183.55   

Labor  mfg.  water 
gas 669.87   16,853.42        8.73c. 


(8)  Purification  labor 

Coal  gas 329.48   

Water  gas....  28.29   357.77        0.18c. 


(9)  Purification  supplies 2 . 88  0 .  OOc. 

(10)  Water  (see  boiler  fuel) 

(11)  Expense  at  works 2,391 .00  1 .24c. 

(12)  Maintenance    coal    gas    ap- 

paratus    5,247 .16  2 . 72c. 

(13)  Maintenance  water  gas  ap- 

paratus    1,498.67  0.77c. 

Forward,        $5,123.69  $166,583.28  88.91c. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


25 


Brought  Forward,        $5,123.69  $166,583.28     88.91c. 

(14)  Maintenance    buildings    ap- 

paratus               201 .39   0.  lOc. 

(15)  District  holder  expense 4,414 .04   2 . 28c. 

(16)  Distribution,  supt.  offi.  exp. 

and  street  expense 4,799 .56   2 . 48c. 

(17)  Consumers  premises  and  arc 

light  expense 10,393 .57   5.38c. 

18)  Pumping  gas 4,517.35   2.33c. 

19)  Setting  and  removing  meters         3,545 .53   1 . 84c. 

20)  Maintenance  of  street  mains.         3,049 .12   1 . 58c. 

(21)  Maintenance  of  services 1,767.03   0.92c. 

(22)  Maintenance  of  meters 2,982 .98   1 . 55c. 

(23)  Meter  department  expenses.          1,961 .77   1  .Olc. 

(24)  Commercial   supt.    and    ex- 

penditures          25,495.70   13.20c. 

(25)  Commercial  office  salaries . . .        13,890 .77   7 . 19c. 

(26)  Commercial    bill    collection 

expense 5,240.90   2.71c. 

(27)  Reading  meters 2,609.79   1 .35c. 

(28)  Office  expense  (general) 4,708 .56   2 . 44c. 

(29)  General  executive  salaries.  .          8,443.38   4.37c. 

(30)  Insurance,  legal  and  miscel. 

expenses 21,164.36   10.96c. 

(31)  Taxes  and  royalty 11,388.57  2,850.63  7.32c. 

Totals  (fixed  70.27c.) $135,698.06  $169,433.91  158. Olc. 

Variation  due  to  decimals .  lie. 

Credits — For  residuals. 

(32)  Coke,  13,704.9  tons  at  $3.67 .        50,269 . 71 
Tar  205,178  gals,  at  3J4c.  .  .          6,668.26 
Ammonia  80,414  at  3.09c .  . .          2,484 . 07 
Retort  carbon 30.00 

(33)  Duplicate    gas    charges    to 

depts 1,849.25  61,301.29  31.74c. 

(34)  Balance  of  proportional  op.  exp 108,132.62  55.99c. 

The  above  totals  of  operating  expenses  are  the  same  as 
those  of  the  Spokane  Gas  and  Fuel  Company's  books. 

Depreciation  is  omitted  from  them. 

The  above  figures  of  the  operating  expenses  were  furnished 
by  the  manager  of  the  Spokane  Gas  and  fuel  Company, 


26  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

but  the  items  were  segregated  by  myself.  The  fixed  ex- 
penses may  be  said  to  be  for  service  rendered.  The  pro- 
portional expenses  are  for  the  commodity  furnished. 

Segregating  the  Gas  Company's  figures,  the  cost  of  gas  in 
1912  appears  to  have  been  stated  as  follows: 

SECTION  16. — MANUFACTURING  COST. 

Per  1000 
cu.  ft. 
Sold 

(1)  Coal  carbonized $109,345.99      56.62c. 

(2)  Fuel  under  retorts 15,141 .27        7.84c. 

(3)  Generator  fuel 1,568.35        O.Slc. 

4)  Boiler  fuel 14,151 .88        7 .33c. 

5)  Gas  oil , 2,415.89        1.25c. 

6)  Superintendence 2,732 .69        1 . 42c. 

(7)  Labor  manufacturing 16,853 .42        8 .73c. 

(8)  Purification  labor 357 .77       0 . 18c. 

(9)  Purification  supplies 2 . 88        0 .  OOc. 

(10)  Expense  at  works 2,391 .00  1 .24c. 

(11)  Maintenance  of  coal  gas  apparatus 5,247.16  2.72c. 

(12)  Maintenance  of  water  gas  apparatus 1,498.67  0.77c. 

(13)  Maintenance  of  buildings 201 .39  0.  lOc. 

$17i,908.36      89.01c. 
(32)  Less  residuals 61,301.29      31.74c. 


Cost  of  gas  in  holder $110,607 .07      57 . 27c. 

This  57c.  is  so  unusually  high  that  even  coal  at  $5.28  per 
ton  does  not  explain  it. 

A  thorough  examination  of  the  items  of  the  operating 
accounts  and  of  the  method  of  operation  would  be  necessary 
before  accepting  as  final,  a  cost  of  57.27c.  per  1,000  cu.ft. 
sold  as  a  proper  cost,  for  it  far  exceeds  almost  any  instance 
I  have  met  with. 

With  the  usual  methods  of  handling  coal  and  present 
local,  prices,  coal  gas  should  be  produced  at  about  45c.  to 
50c.  holder  cost  in  Spokane — perhaps  even  less. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          27 
SECTION  17. — DISTRIBUTING  COST. 


(15)  District  holder  expense 

] 
$4,414  04 

Per  1000 
cu.  ft. 
2.28c. 

(16)  Distribution  supt.  offi.  exp.  and  st.  exp.  .  . 
(18)  Pumping  gas                                     .  . 

4,799.56 
4,517.35 

2.48c. 
2.33c. 

(19)  Setting  and  removing  meters    

3,545  .  53 

1.84c. 

(20)  Maintenance  of  street  mains  

3,049  .  12 

1.58c. 

(21)  Maintenance  of  services  

1,767.03 

0.92c. 

(22)  Maintenance  of  meters  

2,982.98 

1.55c. 

(23)  Meter  department  expenses  

1,961.77 

l.Olc. 

Cost  of  distributing  gas  to  meters $27,037 .38      13 . 99c. 

(17)  Consumers  premises  and  arc  light  expense 

and  repairs 10,393.57        5.38c 

This  item  17  is  due  to  the  fact  that  this  Gas  Company 
loans  and  keeps  in  repair  some  1,345  gas  arc  lights  for  its 
consumers. 

It  does  not  appear  proper  to  overcharge  other  consumers 
to  carry  their  arc  lights  for  a  specially  favored  class. 

SECTION    18. — COMMERCIAL    SUPERINTENDENCE    AND    EX- 
PENDITURES. 

Item  24 — $25,495.70  is  a  charge  for  promoting  new  busi- 
ness and  adds  13. 2c.  per  1,000  cu.ft  sold  to  the  apparent 
cost  of  gas.  It  was  estimated  as  follows  for  1912: 

Advertising $11,341.65 

Circulars 55 . 17 

Demonstrating 100 . 30 

Exhibition  expenses 40 . 35 

Salaries  and  bonus 16,238.88 

Loss  on  appliances 1,236.95 

Connecting  appliances 16,834 . 72 

Miscellaneous  expenses 10,159.45 

Total..  .  $56,159.45 


28  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Of  this  amount  $25,495.70  was  charged  to  1912  operating 
expenses  and  $30,663.75  charged  to  Suspense  Account.  As 
being  a  deduction  from  income  ordered  by  the  management 
and  in  no  way  unavoidably  necessary  to  the  manufacture 
of  gas,  I  have  eliminated  it  from  the  cost  of  gas.  The 
proper  per  cent  of  one 's  profits  advisable  to  spend  in  seeking 
new  business  is  a  question  for  the  personal  judgment  of  the 
management. 

(25)  Commercial  office  salaries  $13,890.77  (per  1,000  cu. 
ft.  sold  7.19c.)  in  addition  to  the  $16,238.88  partially  cover- 
ed in  item  (24)  should  be  analyzed  before  being  admitted. 

SECTION  19. — GENERAL  OFFICE  EXPENSE  AND  ADMINISTRA- 
TION. 


(26)  Bill  collection  expense  

Per  1000 
cu.  ft. 
$5,240.90       2.71c. 

(27)  Reading  meters  

2,609.79        1.35c. 

(28)  General  office  expense  

4,708.56        2.44c. 

(29)  General  executive  salaries 

8,443  38        4  37c. 

(30)  Insurance,  legal  and  misc.  exp  
(31)  Taxes  ana  royalty 

21,164.36      10.96c. 
14,139  20        7.32c. 

Totals $56,306. 19      29.  loc. 

Item  30— Insurance,  etc.,  $21,164.36  or  per  1000  cu.  ft. 
sales  10. 9c.  is  very  large  and  should  be  analyzed  before 
being  finally  accepted  as  unavoidably  necessary  to  the 
manufacture  and  supply  of  gas. 

SECTION  20. — ESTIMATE  OF  THE  PROPER  COST  AND  PRICE 
OF  GAS. 

This  review  and  scrutiny  of  the  salient  figures  of  the 
operating  expense  enables  me  to  form  an  opinion  only  as  to 
the  proper  cost  of  gas  delivered  at  the  consumer's  meter  in 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  29 

Spokane,  for  I  have  not  audited  the  books  or  appraised  the 
works. 

Being  careful  to  be  more  than  liberal  I  would  fix  the 
reasonable  operating  costs  at  not  more  than  the  following: 

Cost  of  gas  in  holder 0.50  per  1000  cu.  ft.  sales 

Cost  of  distribution 14    « 

Cost  of  general  expense 25    « 


Cost  at  consumer's  meter 89    "  ,     " 

SECTION  21. — ALLOWANCE  FOR  NEW  BUSINESS. 

Much  discussion  has  arisen  as  to  whether  there  should 
be  any  allowance  in  the  manufacturing  cost  of  gas  for  the 
promotion  of  new  business. 

The  Gas  Committee  of  the  City  Council  of  Minneapolis 
in  its  now  standard  adjustment  with  and  franchise  for,  its 
Gas  Company  agreed  upon  2J^c.  per  1,000  cu.  ft.  sales  as 
reasonable  and  allowable,  so  I  would  be  inclined  to  recom- 
mend 3c.  per  1,000  cu.  ft.  as  an  allowance  for  new  business 
expense  for  Spokane  and  have  included  it  in  general  expense 
above. 

SECTION   22. — COMPARISONS  WITH   TACOMA  AND   SEATTLE 
GAS. 

From  the  report  of  the  Public  Service  Engineers  of  the 
State  of  Washington  upon  the  Tacoma  Gas  plant  I  take  the 
following  figures  (pages  138  and  140)  derived  from  their 
audits  of  these  companies '  books. 


30  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Item  Tacoma  Seattle  Spokane 

Cost  of  coal,  per  ton $3.35  $3.26  $5. 10 

Cost  of  manufacturing 37 . 22  •  28 . 00  50 . 77 

Cost  of  distribution 8.84         9.20  21 .30 

Cost  of  general  expense 27 . 98  16 . 30  32 . 95 

The  average  cost  of  Seattle  and  Tacoma  coal  is  $3.30 
or  $1.80  less  than  Spokane.  Since  10,000  cu.  ft.  is  the 
average  yield  of  gas  per  ton  this  would  increase  the  cost  of 
manufacturing  about  18c.  per  1,000  cu.  ft.,  unless  the  price 
of  coke  and  residuals  is  correspondingly  increased,  which  is 
not  probable.  The  average  cost  of  manufacturing  for 
Tacoma  and  Seattle  is  32.61c.  giving  for  Spokane  about  50c. 
per  1,000  cu.  ft.  sales.  The  average  cost  of  distribution  for 
Tacoma  and  Seattle  is  9.02c. 

For  Spokane  we  have  extra  expenses,  viz. : 
(15)  District  holder  expense.  ...    2.28  per  1000  cu.  ft.  sales 
(18)  Pumping  gas 2.33     " 


4.61     "       "         "         " 

This  gives  about  14c.  per  1,000  cu.  ft.  sales.  Spokane 
appears  to  labor  not  only  under  the  disadvantage  of  high 
priced  coal  but  also  under  the  remediable  disadvantage  of 
an  expensive  poorly  designed  method  of  street  distribution. 

The  average  of  cost  of  general  expense  for  Tacoma  and 
Seattle  is  22.14c.  per  1,000  cu.  ft.  sales.  This  is  about  3c. 
per  1,000  cu.  ft.  less  than  the  25c.  fixed  by  myself  inde- 
pendently. My  own  figures  for  the  reasonable  Spokane 
cost  of  gas  were  fixed  without  any  knowledge  of  Tacoma 
and  Seattle  costs,  this  comparison  being  made  subsequently, 
and  confirming  the  liberality  of  my  mental  attitude  toward 
the  Spokane  Gas  Company. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          31 

SECTION  23. — PROFIT  AND  DEPRECIATION  COSTS  PER  1,000 
Cu.  FT. 

In  estimating  the  annual  capacity  of  gas  works;  engi- 
neers by  common  consent  multiply  the  work 's  daily  capacity 
of  200  days  rather  than  365,  since  this  gives  an  ample  margin 
of  165  days  while  repairing  retorts  and  other  gas  making 
machinery,  and  covers  the  maximum  daily  demand  for  the 
long  winter  nights. 

The  daily  capacity  of  the  Spokane  gas  works  appears  to 
be  as  follows: 

One  9  ft.  Lowe  water  gas  set,  cu.  ft 750,000 

96  Coal  gas  retorts  at  8000  cu.  ft 768,000 

Total  daily  capacity 1,518,000 

The  yearly  capacity  is  200  times  the  daily  or  303,600,- 
000  cu.  ft.  The  water  gas  set  could  be  urged  to  1,000,000 
cu.  ft.  daily  capacity,  and  the  retorts  which  are  estimated 
at  6  hour  400  Ibs.  charges  could  be  operated  on  4  hour 
charges  and  higher  heats — at  12,000  cu.  ft.,  per  day  with 
good  economical  results. 

There  is  an  ample  margin  of  time  allowed  for  repairs, 
and  for  very  moderate  operation  in  my  estimate  of  303,- 
600,000  cu.  ft.  We  have  previously  found  the  present  value 
of  the  works  to  be  $939.726.  Dividing  this  by  303,600  per 
1,000  cu.  ft.  we  have  as  the  investment  per  1,000  cu.  ft. 
capacity  $3.09.  To  the  operating  cost  of  gas  per  1,000  cu.  ft. 
should  be  added  the  profit  and  depreciation  on  its  investment 
per  1.000  cu.  ft.  capacity. 

Net  profit  per  1000  cu.  ft,  7  per  cent  of  $3.09 $0 . 216 

Residual  depreciation  3  per  cent  of  3.09 0.093 

Total.  .  $0"31 


32  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Frequently  gas  companies  compute  their  investment  per 
1,000  cu.  ft.  of  sales.  In  this  case  with  193,109.7  1,000 
cu.  ft.  sales  1912  it  would  be  about  $4.50  per  1,000  cu.  ft. 
but  if  for  any  reason  a  corporation  has  too  far  anticipated 
its  needs  and  has  over-built  or  over-invested  for  them  it 
should  not  expect  the  public  to  carry  an  unreasonable 
burden,  due  to  the  company's  own  blunders  or  extrava- 
gance. 

SECTION  24. — FLAT  RATE  PRICE  FOR  GAS. 

We  can  now  recapitulate  the  costs  givinig  a  fair  and  rea- 
sonable return  per  1,000  cu.  ft.  of  sales  of  gas  for  Spokane: 

Manufacturing  (holder  cost)       cost  per  1000  cu.  ft .  $0 . 50 

Distribution "       "       "         "     .      0. 14 

General  expense  "       "       "         "     .     0 . 25 

Net  profit  "       "       «         "     .     0.216 

Residual  depreciation  "       "       "         "     .     0.093 


Total  fair  and  reasonable  price     "       "       "         "     .     $1.20 

You  will  recall  that  I  have  mentioned  an  allowance  of 
2j/£c.  per  1,000  cu.  ft.  made  for  new  business  expense  in 
Minneapolis  and  suggested  3c.,  but  this  is  a  matter  of 
personal  judgment  and  liberality.  The  general  expense  (25c.) 
exceeds  the  Tacoma  and  Seattle  average  (22c.)  by  3c. 

One  thing  all  experience  in  the  gas  business  teaches — 
reduction  of  price  and  that  only  increases  gas  sales  per 
capita — without  it  all  advertising  and  solicitation  appear  to 
be  futile  piffle. 

SECTION  25. — STEPPED  RATE  PRICES  FOR  GAS. 

In  this  system  consumers  using  more  than  a  certain  fixed 
amount  per  month  are  given  a  lower  pnce  for  the  excess. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  33 


ft  *  1   1       *       s       «       * 

***  v      ^      <      &       * 


Diagram  Seattle  and  Tacoma  Rates. 


34  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Its  object  is  to  obtain  large  individual  consumers  of  gas  for 
cooking,  heating,  power,  etc.,  and  thereby  to  increase  the 
use  of  gas  during  daylight  hours. 

Most  of  the  gas  companies  that  have  adopted  stepped 
rates  begin  with  5,000  or  10,000  cu.  ft.  per  month  per  meter 
and  thereby  get  so  far  outside  of  the  usual  highest  metro- 
politan average  of  3,000  per  month  per  meter  that  very  few 
consumers  gain  anything  but  a  false  impression  of  the  gas 
company's  liberality.  (See  Diagram  Seattle  and  Tacoma 
Rates.) 

If  in  Spokane,  10,000  cu.  ft.  per  meter  per  month  were 
fixed  as  the  minimum  limit  only  about  1J^  Per  cent  or  127 
out  of  8,443  consumers  would  pay  less  than  the  highest 
rate  as  will  be  learned  from  the  subjoined  tabulation  of 
consumers.  So  far  as  the  writer  knows  no  rational  and 
practical  quantitative  explanation  of  the  stepped  rates  opera- 
tion has  ever  been  given  by  the  gas  companies  which  have, 
thus  cautiously,  appeared  to  have  adopted  it. 

SPOKANE  GAS  AND  FUEL  COMPANY 
Tabulation  of  Consumers 

Year  Ending  October  31,  1912. 

Per  meter 
Cu.  ft.          Cu.  ft.  per  month 

Oto         500 1,009 

500   «       1,000 2,207 

1,000    «       1,500 1,425 

1,500    «       2,000 1,645 

2,000    «       2,500 634 

2,500    «       3,000 423 

3,000    «       3,500 ...       238 

Forward,  7,581 


PEACTICAL  RATE  MAKING  AND  APPRAISEMENT  35 

Per  meter 

per  month 

Cu.  ft.  Cu.  ft.  Brought  Forward,   7,581 

3,500  "       4,000 152 

4,000  «       4,500 128 

4,500  "       5,000 98 

5,000  "       5,500 76 

5,500  «       6,000 60 

6,000  «       6,500 59 

6,500  "       7,000 31 

7,000  «       7,500. 24 

7,500  «       8,000 24 

8,000  "       9,000 39 

9,000  "     10,000 43 

10,000  «     12,500 57 

12,500  "     15,000 

15,000  «  17,500 20 

17,500  «  20,000 9 

20,000  "  25,000 33 

25,000  «  50,000 6 

100,000  «  200,000 _2 

8,442 

By  means  of  expurgations  from  the  accounts  of  the  Spo- 
kane Gas  and  Fuel  Company  of  unnecessary  expenditures, 
what  in  the  writer's  opinion  is  a  judicially  fair  flat  rate  price, 
has  been  obtained.  It  is  $1.20  per  1,000  cu.  ft.  for  all  con- 
sumers but  confessedly  this  rate  is  only  an  average  price 
protecting  the  Gas  Company  in  a  fair  profit.  Many  small 
consumers  pay  too  low  a  price  and  the  company  must  recoup 
its  losses  on  them,  by  making  large  consumers  pay  too  high 
a  price.  The  rational  and  practical  reason  for  stepped  rates 
arises  from  the  fact  that  in  the  operating  expenses  of  gas 
making  and  supply  the  items  of  cost  should  be  segregated 
into  two  classes,  viz.: 

(1)  Service  or  fixed  operating  expenses  regularly  accruing 


36  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

with  the  passage  of  time  regardless  of  any  temporary  varia- 
tion in  the  sales  of  gas. 

(2)  Commodity  or  proportional  operating  expenses  in- 
creasing or  decreasing  with  the  increase  or  decrease  of  gas 
sales. 

Subjoined  is  an  expurgated  segregation  of  the  fixed  and 
proportional  operating  expenses  for  Spokane. 

STEPPED  RATE  SYSTEM. 

Expurgated  Segregation  of  the  Fixed  and  Proportional  Expenses 
Required  for  the  Cost  of  Supplying  Gas  in  Spokane,  1912. 

If  we  add  the  residuals  per  1,000  cu.  ft.  (31.74c.)  to  50c. 
the  gross  holder  cost  per  1,000  cu.  ft.  sales  (deduced  from  the 
Seattle  and  Tacoma  average  (32c.)  by  adding  18c.  per  1,000 
cu.  ft.  to  it)  we  obtain  81.74c.  as  compared  with  89.01c. 
gross  holder  cost  per  1,000  cu.  ft.  sales  given  by  Spokane 
Gas  Company. 

Hence  the  gross  cost  estimated  (81.74c.)  is  8.17  per  cent 
less  than  the  book  cost  89.01  c.  offered. 

Again  if  we  subtract  25c.  estimated  general  expense  from 
29.15c.  book  cost  offered  we  reduce  this  cost  14.24  per  cent. 

From  the  books  of  the  Spokane  Gas  and  Fuel  Company. 
Total  fixed  operation  expenses  as  stated  by 

gas  company $135,698.06 

(6)  Less  8.17  per  cent  of  $2,732 . 69 
(11)  «  8.17  per  cent  of  2,391.00 
(14)  "  8.17  per  cent  of  201 . 39 

8.17  per  cent  of  "5^5251)8 ....         435 . 06 
id 


.70 
>.77 
(26)  to  (31)  Less  14.24%  56,306.19  gen.  offi.  exp. . 

Less  Taxes      2,850.63  $53,555.56          7,626.31    57,841.41 

Expurgated  fixed  operating  exp $77,856 . 65 

or  193,109.7  1000  cu.  ft.  sales  at  40.31c. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  37 

From  the  books  of  the  Spokane  Gas  and  Fuel  Company. 
Total     proportional     operating     expenses     as 

stated  by  company $108,132.62 

Less  8.17%  of  171,908.36 

5,325.08  165,583.28  $13,528.15 

(31)  Less  14.24%  of  2,850.63  taxes 405.93    13,934.08 

Expurgated  proportional  operating  expense.  .  .  $94,198.54 
193,109.7  1000  cu.  ft.  sales  at  48.79c. 
(Check)  total  operating  cost  89. Ic. 

From  the  above  it  would  appear  probable  that  $71,775 
had  been  unnecessarily  spent  in  1912  as  follows: 

For  fixed  operating  expenses $57,841 .41 

For  proportional  operating  expenses 13,934 . 08 

Total. $71,775.49 

The  proportion  of  this  Company's  present  value  invest- 
ment ($939,726)  required  to  supply  annually  193,109,700 
cu.  ft.  of  gas  at  $3.0953  per  1,000  cu.  ft.  capacity  is: 

Used  and  useful  investment $597,732.45 

And  profit  and  depreciation  (7  plus  3)  10  per 

cent 59,773.24 

We  will  in  this  case  regard  gas  as  a  commodity  with  a 
margin  of  31c.  on  each  unit  rather  than  as  a  public  service 
(until  very  small  consumers  are  reached)  and  successively 
vary  the  annual  sales  starting  with  the  proper  regimen 
of  the  year  1912  after  expurgation,  of  its  accounts. 

1912.     Total  Annual  Sales  in  1000  cu.  ft.,  193,109.7. 

Per  1000 
cu.  ft. 

Fixed  operating  expenses $77,853 .65    40 .31c. 

Proportional  operating  expenses 94,198 . 54    48.79c. 

Profit  and  depreciation 59,773 .24    30 .95c. 

Total  price $231,828.43  $1 .2005 


38  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Average  gas  sold  1912  per  meter  per  month  cu.  ft.,  1,906. 

The  above  presents  the  proper  practical  conditions  under 
which  $1.20  per  1,000  cu.  ft.  gas  should  have  been  sold  in 
1912  at  a  fair  and  reasonable  profit.  Since  the  stepped 
rate  is  for  the  primary  purpose  of  increasing  the  sales  per 
meter  under  the  existing  regimen;  for  the  purpose  of  fixing 
quantity  rates  we  can  assume  with  commercial  adequacy 
that  the  total  annual  gas  sales  of  works  and  the  average 
monthly  sales  per  meter  vary  in  the  same  proportion  for  the 
stepped  rate  analysis  until  we  reach  about  500  cu.  ft.  per 
meter  per  month  or  about  6,000  annually  per  meter  or 
about  50,658,000  cu.  ft.  total  annual  sales  of  works,  after 
which  a  minimum  monthly  bill  of  15c.  per  meter  light  is 
necessary  to  cover  fixed  cost  only  or  26c.  to  cover  fixed 
cost,  profit  and  depreciation  per  meter  light. 

This  will  be  more  fully  explained  hereafter  in  the  para- 
graph on  minimum  charges. 

1912.     The  Total  of  Variables  for  193,109.7  1,000  cu.  ft.  sales  is 

Per  1000 
cu.  ft. 

Proportional  operating  expense $94,198 .54    48 . 79c. 

Profit  and  depreciation 59,773.24    30.95c. 

Gives  total  variable $153,971 .78    79.74c. 

This  varies  with  the  load  while  the  fixed  operating  ex- 
penses, $77,856.65,  do  not,  if  we  sell  gas  as  a  commodity. 

We  can  now  vary  the  total  annual  sales  of  gas  and  obtain 
proper  corresponding  rates  for  it. 

Total  Annual  Sales  in  1,000  cu.ft.  (assumed)  100,000. 

Per  1000 
cu.  ft. 

Fixed  operating  expense $77,856 .65    77 . 86c. 

Proportional  operating  expense,  profit  and  de- 
preciation    79,732.80    79 . 74c. 

Total  price $157,589.45  $1  5760 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  39 

Average  gas  sold  per  meter  per  month  per  cu.  ft.,  987. 
For  commercial  purposes  we  may  consider  this  to  be  about 
1,000  cu.  ft. 

Total  Annual  Sales  in  1,000  cu.  ft.  (assumed)  50,000. 

Per  1000 
cu.  ft. 

Fixed  operating  expense $77,856.65  155. 71c. 

Proportional  operating  expense,  profit  and  de- 
preciation         39,866.40    79.74c. 

Total  price $108,723.05  23   .44c. 

Average  gas  sold  per  meter  per  month  cu.  ft.,  493. 

Total  Annual  Sales  in  1,000  cu.ft.  (assumed)  200,000. 

Per  1000 
cu.  ft. 

Fixed  operating  axpense $77,856 .65    38 . 93c. 

Proportional  operating  expense,  profit  and  de- 
preciation        159,465 .60    79 . 73c. 

Total  price $237,322.25  118. 66c. 

Average  gas  sold  per  meter  per  month,  cu.  ft.,  1,974. 
Total  Annual  Sales  in  1,000  cu.ft.  (assumed)  300,000. 

Per  1000 
cu.  ft. 

Fixed  operating  expense $77,856 .65    25 . 95c. 

Proportional  operating  expense,  profit  and  de- 
preciation        239,198 .40    79 . 73c. 

Total  price $317,055.05  105. 68c. 

Average  gas  sold  per  meter  per  month  cu.  ft.,  2,961. 

Total  Annual  Sales  in  1,000  cu.ft.  (assumed)  500,000. 

Per  1000 
cu.  ft. 

Fixed  operating  expense $77,856 .65    15 . 57c. 

Proportional  operating  expense,  profit  and  de- 
preciation        398,664 .00    79 . 74c. 

Total  price $476,520.65    95.31c. 

Average  sold  per  meter  per  month   cu.  ft.,  4,935. 


40  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Total  Annual  Sales  in  1,000  cu.ft.  (assumed)  1,000,000. 

Per  1000 
cu.  ft. 

Fixed  operating  expense $77,856 .65      7 . 79c. 

Proportional  operating  expense,  profit  and  de- 
preciation        797,328 .00    79 . 75c. 


Total  price $875,184.65    87.54c. 

Average  gas  sold  per  meter  per  month,  cu.  ft.,  9,870. 

The  necessary  assumption  for  a  commodity  rate  is  that 
with  any  given  regimen  (say  of  1912)  that  its  total  annual 
sales  are  in  direct  proportion  to  each  individual  sale  or  aver- 
age meter  record  for  one  month. 

Diagram  2  graphically  depicts  this  natural  law  of  prices, 
by  means  of  the  commodity  curve  shown.  This  curve 
provides  for  a  constant  margin  of  profit  and  depreciation 
of  10  per  cent  on  the  necessary  investment  ($3.09  per  1,000 
cu.  ft.  capacity)  or  31  cents  per  1,000  cu.  ft.  and  also  for  the 
fixed  and  proportional  operating  expenses  for  each  assumed 
rate  of  delivery  to  consumers. 

So  long  as  the  regimen  used  does  not  change  this  com- 
modity curve  will  give  consistent  prices. 

Again  I  must  call  your  attention  to  the  fact  that  it  is  not 
a  scientifically  exact  curve  but  may  be  used  as  commercially 
adequate  and  as  our  only  means  of  computing  rationally 
and  practically  approximate  stepped  rates. 

Any  point  on  this  curve  fixes  the  fair  price  per  1,000  cu.  ft. 
for  the  total  annual  sales  corresponding  to  it,  provided  the 
works  are  not  over-built. 

The  area  of  the  rectangle  having  this  point  for  its  upper  right 
hand  corner  and  the  vertical  and  horizontal  axis  as  sides  is 
proportional  to  the  total  revenue  or  gross  earnings  of  the  plant. 

This  latter  fact  permits  us  to  adjust  the  stepped  rates  so 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


41 


D  O  O  O  Q  O 
Q  »  *  *  «\J  *> 
,«•  J«  ,*•  «*  .N  ,«> 


42  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

that  the  gross  earnings  of  the  plant  for  1912  with  a  flat  rate 
of  $1.20  per  1,000  cu.  ft.  will  not  be  reduced  by  a  stepped 
rate.  This  expurgated  flat  rate  price  (of  $1.20  per  1,000 
cu.  ft.)  which  I  have  so  laboriously  deduced  is  the  pivotal 
point  and  basis  for  the  stepped  rate. 

If  we  assume  the  following  single  stepped  rate  as  follows : 
For  the  first  1,000  cu.  ft.  per  meter  per  month  $1.40  per 
1,000  cu.  ft.,  and  for  all  in  excess  of  1,000  cu.  ft.  per  meter 
per  month,  $1.00  per  1,000  cu.  ft.  We  have 

For  the  first  1000  cu.  ft $1 . 40 

For  the  second  1000  cu.  ft .  .  1 . 00 


For  the  average  per  1000  cu.  ft $1.20 

You  will  recall  that  the  actual  average  per  meter  per 
month  was  1,906  cu.  ft.  and  the  flat  rate  price,  $1.20  per 
1,000  cu.  ft.  So  this  stepped  rate  will  not  commercially 
change  the  total  earnings  save  slightly  in  favor  of  the  Gas 
Company  up  to  its  present  total  sales  of  193,109,700  cu.  ft. 
per  year  at  $1.20  flat. 

Beyond  about  193,109.7  1,000  cu.  ft.  total  sales  it 
enables  lower  rates  for  industrial  purposes,  without  loss  of 
profit  per  1,000  cu.  ft. 

If,  for  instance,  a  meter  reads  10,000  cu.  ft.  per  month  the 
bill  will  be: 

1000  cu.  ft.  at  $1.40 $1 .40 

9000  cu.  ft.  at  $1.00.  .  9.00 


Total $10.40 

Average  per  1000  cu.  ft.,  $1.04. 

Below  $1.20  the  stepped   rate    suggested   for    increased 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  43 

sales  is  a  little  higher  than  the  natural  commodity  curve 
of  prices.  Diagram  2. 

Probably  the  company  will  find  it  advantageous  to  offer 
a  secondary  rate  much  lower  than  $1.00  since  we  have  found 
proportional  expense,  profits  and  depreciation  to  properly 
aggregate  about  80c.  and  the  fixed  expenses  really  almost 
vanish  with  very  large  consumers. 

The  minimum  charge  for  stepped  rates  should  have  our 
consideration.  Although  gas  has  been  treated  as  a  com- 
modity yielding  a  fixed  profit  of  31c.  on  each  1,000  cu.  ft. 
sold,  still  a  gas  company  is  a  public  servant  particularly  for 
patrons  requiring  a  small  amount  of  gas  and  they  should 
pay  for  such  service.  The  fixed  operating  expenditures  are 
$77,856.65. 

The  meters  reported  in  active  operation,  8,443,  averaging 
5.065  lights,  each. 

The  total  number  of  lights  is  42,764.     We  have 

Yearly  fixed  cost  per  meter  light $1 . 82 

Monthly  fixed  cost  per  meter  light 0.15 

If  we  could  superadd  these  meter  light  minimum  charges 
to  the  straight  meter  gas  bill  the  Gas  Company  could  charge 
a  flat  rate  of  79.73  (80c.)  per  1,000  cu.  ft.  sales  and  still 
obtain  its  regular  margin  of  31c.  per  1,000  cu.  ft.  covering 
profit  and  depreciation. 

It  is  very  important  to  note  this  fact  for  if  the  public  knew 
how  to  be  fair  it  would  intelligently  insist  on  this  method  of 
making  rates,  for  all  fixed  expenses  would  be  covered  by  15c. 
per  month  per  meter  light  and  the  price  of  gas  be  a  matter  of 
raw  material  and  productive  labor,  with  profits  and  deprecia- 


44  PRACTICAL  BATE  MAKING  AND  APPRAISEMENT 

tion  added,  thus  providing  them  for  enlargement  of  the  works 
as  it  might  be  required. 

Repeating,  we  would  in  this  case  only  pay  15c.  per  meter 
light  per  month  and  80c.  per  1,000  cu.  ft.  flat  rate. 

Further  the  Gas  Company  would  make  a  margin  of  31c. 
on  each  1,000  cu.  ft.  after  defraying  its  proportional  oper- 
ating expense  of  49c.  per  1,000  cu.  ft. 

The  obstinate  hostility  of  the  public  to  a  fixed  minimum 
charge  for  cost  of  service  which  in  Spokane's  case  would 
average  5  lights  at  15c.  or  75c.  per  month  per  meter 
appears  to  require  the  stepped  rate  to  conceal  it. 

In  the  deduced  flat  rate  of  $1.20  per  1,000  cu.  ft.  as  also  in 
the  derived  stepped  rate  you  will  see  that  the  proper  fixed 
expenses  are  covered  and  so  there  is  no  necessity  of  a  meter 
charge  of  15c.  per  meter  light  per  month  or  75c.  average 
per  meter  per  month  to  protect  the  Gas  Company,  but  as  I 
have  said  there  always  remains  the  uncertainty  of  a  possible 
change  of  regimen  requiring  a  margin  and  25c.  per  meter 
per  month  now  permitted  allows  a  possible  margin  of  not 
more  than  $25,329  per  year  for  the  Spokane  Gas  and  Fuel 
Company  to  come  and  go  upon,  (8,443  meters  in  use). 

I  beg  leave  therefore  to  submit  for  your  consideration  as  a 
step  rate  system  of  prices  suitable  for  the  city  of  Spokane  and 
protecting  its  Gas  Company. 

First.  A  charge  of  25c.  per  meter  per  month,  as  a  mini- 
mum, but  not  to  be  charged  if  the  actual  gas  bill  at  $1.40 
net  per  1,000  cu.  ft.  equals  or  exceeds  it  in  amount. 

Second.  A  gross  rate  of  $1.50  per  1,000  cu.  ft.  for  the 
first  (1,000)  one  thousand  cu.  ft.  per  meter  per  month. 

Third.  A  gross  rate  of  $1.10  per  1,000  cu.  ft.  for  all  excess 
over  (1,000)  one  thousand  cu.  ft.  per  meter  per  month. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  45 

Fourth.  A  deduction  of  (10)  ten  cents  per  1,000  cu.  ft. 
from  all  gas  bills  paid  within  (10)  ten  days  after  presenta- 
tion which  is  to  be  made  by  the  Spokane  Gas  and  Fuel 
Company. 

Referring  back  to  tabulation  of  consumers  and  Diagram  2, 
we  find: 

Paying  $1.40 3.216  consumers 


Paving 

1.20  or  over 

3,070 

Paving 

1.13  or  over  

1,057 

Paving; 

1.08  or  over  

616 

Paving 

1.04  or  over 

356 

Paying 

1.00  or  over  

127 

8,442 

This  total  obtained  from  the  Public  Service  Commission 
varies  slightly  from  the  8,443  obtained  from  the  Gas  Com- 
pany but  serves  just  as  well  to  show  that  6,286  consumers  of 
8,442  (8,443)  will  pay  $1.20  or  over  per  1,000  cu.  ft.  under 
the  stepped  rate  system  submitted. 

It  is  too  obvious  to  again  require  emphasis  that  all  large 
users  of  gas  for  commercial  purposes  will  pay  about  $1.00 
per  1,000  cu.  ft.,  and  that  the  Spokane  Gas  and  Fuel 
Company  may  even  find  it  advantageous  to  give  as  low  as 
an  80c.  rate  in  case  of  very  great  consumers. 

SECTION  26. — FINANCES,  SPOKANE  GAS  AND  FUEL  COMPANY. 

Capital  stock,  preferred $300,000 . 00 

Capital  stock,  common 2,000,000.00 

Bonds 1,345,000.00 

Due  1944,  5  per  cent  interest. 


46          PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

SPOKANE  GAS  AND  FUEL  COMPANY,  SPOKANE,  WASH. 

Incorporated  November  15,  1909,  under  the  laws  of  the 
State  of  Washington.  Owns  all  the  stock  of  the  Union  Gas 
Company,  which  owns  all  of  the  preferred  stock  and  992. 
per  cent  of  the  common  stock  of  the  Spokane  Falls  Gas  Light 
Company.  Operated  by  the  Doherty  Operating  Company. 
Acquired  on  the  Cities  Service  Company,  September,  1910. 

Franchise. — Dated  June  14,  1904.     Forty-one  years. 

Capital  Stock. — Authorized  and  outstanding:  Common, 
$2,000,000;  6  per  cent  preferred,  $300,000.  Total  $2,300,- 

000.  Preferred  is  cumulative  after  July  14,  1912.     Shares 
$100.     In  September,    1910,   the  Cities  Service  Company 
acquired  the  entire  common  stock  of  this  company,  giving 
in  exchange  for  each  $100  of  common  stock,  $15  of  its  own 
common  and  $30  of  its  preferred   stock.     Transfer  agents 
Henry  L.  Doherty  and  Company,  New  York,  N.  Y. 

Funded  Debt. — $795,000.  First  and  refunding  mortgage, 
5  per  cent  thirty-five  year  sinking  fund  bonds,  dated  De- 
cember 1,  1909,  due  August,  1944;  interest  payable  February 

1,  and  August  1,  at  office  of  Henry  L.  Doherty  and  Company, 
New  York.     Trustee    Central  Trust  Company,  New  York. 
Coupons,  $1,000.     Registerable  as  to  principal.     Redeem- 
able on  any  interest  date  at  105  and  interest.     Sinking  fund 
on  all  outstanding  bonds,  including  prior  lien,  July  each 
year;  1911-1916  ^  per  cent  of  bonds;  after  July,  1916,  1  per 
cent  of  bonds  until  all  bonds  are  redeemed.     Secured  on  all 
property.     Authorized:    $5,000,000,    of   which   a    sufficient 
amount  is  reserved  to  retire  prior  liens  at  par. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  47 

UNION  GAS  COMPANY. 
(Controlled  by  Stock  Ownership) 

Incorporated  October  6,  1904,  in  Virginia.  Owns  99  per 
cent  of  the  stock  of  the  Spokane  Falls  Gas  Light  Company. 
Franchise  expires  June  14,  1945. 

Capital  Stock. — Authorized  and  outstanding,  $600,000 
common  and  $300,000  6  per  cent  cumulative  preferred;  par 
$100.  Dividends  on  preferred,  payable  semi-annually  at 
office  of  N.  W.  Halsey  and  Company,  New  York,  transfer 
agents.  Entire  stock  is  owned  by  Spokane  Gas  and  Fuel 
Company. 

Bonded  Debt.— $550,000  First  and  Collateral  Trust  Gold 
5s.  dated  July  1,  1905;  due  July  1,  1935;  interest  J  &  J.  I. 
at  N.  W.  Halsey  and  Company,  New  York.  U.  S.  Mortgage 
and  Trust  Company,  New  York,  and  G.  M.  Cummings, 
Trustees.  Coupon  (principal  may  be  registered),  $1,000. 
Secured  on  all  property  and  pledge  of  1,486  shares  of  stock 
of  Spokane  Falls  Gas  Light  Company.  Sinking  fund,  1 
per  cent  of  outstanding  bonds  from  July,  1911  to  1916,  and  2 
per  cent  thereafter.  Authorized,  $1,000,000. 

SPOKANE  FALLS  GAS  LIGHT  COMPANY. 

Controlled  by  stock  ownership  by  the  Union  Gas  Company. 
Stock  issue  $50,000  preferred  and  $200,000  common,  of  which 
all  preferred  and  $99,400  of  the  common  is  outstanding. 
Transfer  agents,  Henry  L.  Doherty  and  Company.  Fran- 
chise date,  May  6,  1902,  for  forty-three  years. 
Cities  Service  Co.,  New  York  City. 

Office,  60  Wall  Street. 


48  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Capital  stock, pref.,  auth.,  $30,000,000;  issued  $8,844,090; 
com.,  auth.,  $20,000,000;  issued,  $4,979,045;  ann.  div., 
pref.,  6  per  cent,  com.  3  per  cent. 

Controls  Through  Ownership  of  Stock: 

Brush  Electric  Light  and  Power  Co.    Galveston,   Tex. 
Denver  Gas  and  Electric  Co. 
Empire  District  Electric  Co. 
Spokane  Gas  and  Fuel  Co. 

Doher  y  Operating  Co.,  New  York  City. 
60  Wall  Street. 
Capital  stock,  auth.,  $100,000;  issued,  $55,000. 

Companies  Operated. 

Bristol  Gas  and  Electric  Co.,  Bristol,  Tenn. 
Carthage  Gas  Co.,  Carthage,  Mo. 

Citizens'  Gas,  Electric  and  Heating  Co.,  Mt.  Vernon,  111. 
Denver  Gas  &  Electric  Light  Co.,  Denver,  Colo. 
Pueblo  Gas  &  Fuel  Co.,  Pueblo,  Colo. 
Spokane  Gas  &  Fuel  Co.,  Spokane,  Wash. 
Lincoln  Gas  &  Electric  Light  Co.,  Lincoln,  Neb. 
Lebanon  Gas  &  Fuel  Co.,  Lebanon,  Pa. 
Knoxville  Gas  Co.,  Knoxville,  Tenn. 
Meridian  Light  &  Ry.  Co.,  Meridian,  Miss. 
Montgomery  Light  &  Power  Co.,  Montgomery,  Ala. 
Fremont  Gas  &  Electric  Co.,  Fremont,  Neb. 
Webb  City  and  Carterville  Gas  Co.,  Webb  City,  Mo. 
Trumbull  Public  Service  Co.,  Warren,  O. 
Hattisburg  Traction  Co.,  Hattisburg,  Miss. 

Only  Electrical  Properties. 

Empire  District  Electric  Co.,  Joplin,  Mo. 
Spring  River  Power  Co.,  Galena,  Kan. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  49 

Massillon  Electric  &  Gas  Co.,  Massillon,  O. 

Massillon  Electric  &  Gas  Co.,  Navarre,  O. 

Cumberland    and    Westernport     Electric    Railway  Co., 

Cumberland,  Md. 

Summit  Co.  Power  Co.,  Dillon,  Colo. 
Brush  Electric  Light  and  Power  Co.,  Galveston,  Tex. 

The  apparent  original  structural  cost  of  these  Spokane  gas 
works  is  about  $1,000,000  and  their  present  value  a  little  over 
•$939,000. 

SECTION  27. — INCREASED  SALES  DUE  TO  LOWERED   PRICE 
OF  GAS. 

Although  very  large  sums  of  money  are  reported  to  have 
been  spent  in  securing  new  business,  probably  through  the 
agency  of  some  of  this  company's  allied  organizations,  there 
has  been  no  increase  of  gas  sales  for  1912  over  1911. 

In  the  writer's  opinion,  this  is  due  to  the  fact  that  the 
solicitation  of  new  business  was  not  accompanied  by  a 
reduction  in  the  price  of  gas.  It  is  a  fact  universally  acknow- 
ledged, and  which  can  be  proved  that  the  public  immediately 
respond  to  any  reduction  made  in  the  price  of  gas  and  this 
price  of  gas  is  the  controlling  factor  in  fixing  its  sales  per 
capita. 

So,  assuming  the  population  of  Spokane  to  be  about 
100,000  people,  the  sales  per  capita  for  the  year  1912  were 
about  2,000  cu.  ft. 

In  the  state  of  Massachusetts  we  have  a  large  number  of 
gas  companies  operating  in  cities  under  practically  identical 
conditions  as  to  cost  of  production,  labor  and  raw  material. 
Taking  the  facts  of  these  gas  companies  for  the  year  1907 


50  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

(See  Chapter  XV  Gas  Sales  per  Capita)  we  have  the  follow- 
ing average  results : 

Price  $2.00,  sales  per  capita,    722  cu.  ft. 

Price  $1.75,  sales  per  capita,    898  cu.  ft. 

Price  $1.50,  sales  per  capita,  1395  cu.  ft. 

Price  $1.25,  sales  per  capita,  2535  cu  ft. 

P  ice  $1.00,  sales  per  capita,  3824  cu.  ft. 

In  the  state  of  Massachusetts  for  cities  over  75,000  pop- 
ulation, excluding  Boston,  but  including  eight  cities  with 
prices  ranging  from  98c.  to  84c.  per  thousand  cu.  ft.,  the 
average  annual  sales  per  capita  is  4,330  cu.  ft.  and  the 
average  increase  in  sales  per  capita  for  one  cent  decrease  or 
deduction  in  price  appears  to  be  about  40  cu.  ft.  As  the 
average  flat  rate  obtained  for  Spokane  is  $1.20  per  thousand, 
this  would  mean  a  reduction  of  30c.  in  each  thousand  and  an 
increase  in  sales  per  capita  of  1,200  cu.  ft.  annually.  If  we 
multiply  this  1,200  by  100,000,  we  have  120,000,000  cu.  ft. 
as  the  probable  increase  under  ordinary  conditions  in  the 
annual  sales  of  the  Spokane  Gas  Company  if  it  reduced  its 
price  to  $1.20.  If  we  add  this  120,000,000  cu.  ft.  to  the 
193,000,000  cu.  ft.  of  1912,  we  would  obtain  for  1914  sales 
313,000,000  cu.  ft.  and  the  practical  exhaustion  of  the  full 
capacity  of  the  present  works,  which  at  present  prices  are 
over-built. 

SECTION  28. — QUALITIES  OF  GAS  REQUIRED. 

Of  late  years  the  use  of  gas  for  illumination,  save  by  means 
of  incandescent  or  Welsbach  burner,  has  very  much  decreased 
so  that  at  present  perhaps  10  per  cent  of  the  gas  sold  only  is 
burned  in  open  fish  tail  or  bat's  wings  burners.  The  re- 
mainder of  the  gas  sold  is  used  principally  for  cooking, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  51 

heating,  welding  and  power,  and  its  price  must  be  such  that 
it  can  be  purchased  as  a  commodity  and  not  as  a  luxury. 
Under  this  condition,  largely  affected  by  the  price  of  other 
fuel  in  any  locality,  the  sales  of  gas  increase  with  amazing 
rapidity  when  this  gas  is  offered  at  reasonable  rates,  and  of 
fairly  good  quality.  As  a  matter  of  fact,  the  illuminating 
value  of  artificial  gas  is  getting  less  and  less  important  in  the 
eyes  of  consumers,  for  those  desiring  a  brilliant  illumination 
can  avail  themselves  of  electricity,  but  the  heating  power  of 
gas  is  becoming  of  greater  importance  than  it  ever  has  been 
before;  and  where  natural  gas  with  a  heating  value  of  1,000 
British  Thermal  Units  is  not  available,  artificial  gas  should 
have  a  heating  value  of  something  over  600  B.  T.  U.  For 
the  same  reason  the  pressure  at  which  gas  is  furnished  has 
been  steadily  raised  to  facilitate  its  use  in  gas  stoves  and 
meters  and  in  incandescent  burners  until  now  the  pressure 
insisted  upon  in  most  cities  as  at  the  level  of  the  distributing 
gas  holder,  is  a  maximum  pressure  of  four  inches  and  a 
minimum  pressure  of  2  inches  water  column;  and  for  each 
100  feet  rise  above  the  level  of  the  holder  J/£  inch  to  1  inch  is 
added  to  the  limits  of  pressure  at  the  holder. 

In  Minneapolis  its  recent  franchise  prescribed  18  candle 
power  for  the  gas  and  an  average  thermal  value  of  600  B.T.U. 
with  a  reduction  from  the  monthly  bills  proportionate  to  any 
deficiency  of  heating  power  in  the  gas  below  600  B.  T.  U.  and 
a  fine  if  at  any  time  gas  falls  below  550  B.  T.  U.  per  cu.  ft. 

SECTION  29. — THE  LONDON  SLIDING  SCALE  FOR  GAS. 

See  Chapter  XVI. 

The  Utopian  miracle  of  the  universal  prosperity  of  gas 
companies  in  England,  of  companies  paying  ten  to  fifteen 


52  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

per  cent  dividends  on  first  issues  of  stock,  or  proportionate 
dividends  on  those  stocks  after  conversion  into  lower  dividend 
stocks,  the  fact  that  the  contented  consumers  of  these 
companies  receive  and  pay  for  gas  at  prices  ranging  from48c. 
(South  Metropolitan)  and  upwards,  and  in  some  few  cases 
below  this  price,  appears  to  have  been  wrought  by  the 
sliding  scale.  Further,  the  remaining  companies  not  having 
the  sliding  scale  appear  to  have  been  led  by  example  to  the 
greater  economies  set  before  them  by  those  companies 
operating  under  the  sliding  scale. 

As  a  matter  of  fact,  about  two-thirds  of  all  the  capital 
invested  in  English  Gas  Works  is  subject  to  the  sliding  scale. 

Before  taking  up  the  mathematical  discussion  of  the 
London  sliding  scale,  it  should  be  understood  that  the 
English  method  of  issuing  capital  stock  differs  widely  from 
our  American  methods,  or  lack  of  methods.  In  England, 
gas  corporations  make  separate,  successive  issues  of  stock, 
each  issue  bearing  a  separate  fixed  dividend.  Further, 
watering  stocks  or  issuing  stocks  which  have  not  back  of 
them  their  actual  value  in  fixed  investment  is  impossible  in 
England,  save  as  happened  to  be  the  case  in  some  English 
companies  of  London  where  the  amount  of  an  old  issue  of 
stock  has,  by  permission  of  the  Parliamentary  Committee, 
been  doubled  because  of  the  excessive  profits  resulting  from 
the  sliding  scale  and  the  fact  that  the  price  of  these  stocks 
did  not  rise  pro  rata. 

In  permitting  this  doubling  of  the  amounts  in  certain 
issues  of  stock,  the  Parliamentary  Committee  were  careful  to 
specify  that  in  case  of  condemnation  by  the  municipality  no 
account  should  be  taken  of  the  additional  stock,  and  no 
increase  in  the  value  of  the  plant  be  argued  from  it. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  53 

In  England  it  is  the  practice  to  closely  and  immediately 
divide  up  all  profits  in  dividends,  and  to  make  and  to  sell  by 
public  auction  such  new  issues  of  stock  as  may  be  required 
for  the  extension  or  addition  to  the  working  plant,  whenever 
they  may  be  needed.  From  a  usually  small  initial  issue  of 
capital  stock  at  10  per  cent,  or  under  the  sliding  scale,  the 
rates  of  interest  on  the  subsequent  issues  of  the  stock  of  a 
going  company  are  reduced  to  fixed  dividends  of  7,  5,  4,  or 
even  3J^  per  cent  as  capital  is  required  for  expansion  of 
business. 

Further,  the  public  auction  sales  of  these  stocks  usually 
result  in  cash  premiums,  and  these  premiums  must  be  used  on 
the  plant  to  increase  the  capacity  of  the  works,  and  thereby 
increase  the  value  of  the  works  beyond  the  total  face  value 
of  the  securities  issued,  without  increasing  the  requirements 
for  dividends. 

No  established  general  plan  of  the  sliding  scale  is  stated 
by  the  English,  and  oddly  enough  the  only  explanation 
given  is  that  it  means  an  indefinite  division  of  extra  profits 
between  the  company  and  its  consumers,  the  company 
receiving  an  increase  of  its  dividend  and  the  consumer  a 
reduction  in  the  price  of  gas. 

Each  time  that  the  price  of  gas  is  lowered  below  a  standard 
price  the  dividend  is  increased  above  a  standard  rate  of 
dividend,  corresponding  to  this  price.  For  a  10  per  cent 
standard  dividend  each  penny  (two  cents)  reduction  in  the 
price  of  gas  gives  the  company  the  right  to  increase  the 
dividend  one-fourth  of  one  per  cent;  that  is  to  say,  using 
American  money  terms,  each  one  cent  in  the  reduction  of  the 
price  of  gas  allows  an  increase  of  dividend  of  one-eight  of 
one  per  cent.  There  are  a  great  many  variations  from  this 


54  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

older  arrangement  in  England,  but  perhaps  the  widest  varia- 
tion known  is  to  be  found  in  Boston,  Massachusetts,  when, 
after  many  years  of  competition  and  duplication  of  plants 
and  of  litigation  and  dispute,  it  was  finally  decided  to,  if 
possible,  adopt  the  London  sliding  scale  in  Boston  as  the 
solution  of  their  apparently  interminable  arguments  as  to 
the  fair  price  for  gas. 

Representatives  of  both  the  city  and  of  the  gas  companies 
were  sent  abroad  to  investigate  the  operation  of  the  London 
sliding  scale. 

The  Massachusetts  Gas  and  Electric  Light  Commission 
had  the  matter  of  this  adjustment  of  the  Boston  Gas  Com- 
panies taken  out  of  their  hands  by  legislation. 

The  gas  companies  retaining  a  number  of  experts  had 
their  various  gas  works  appraised  and  brought  in  a  valuation 
of  some  $25,000,000.  The  way  in  which  this  appraisement 
was  made  would  be  very  closely  imitated  if  one  were  to 
appraise  a  scrap  heap  of  old  machinery  at  the  price  of  the 
new  machines  which  had  been  worn  out  and  thrown  into  it. 

Although  then  in  the  employ  of  the  City  of  New  York  I 
was  requested  (and  furnished  with  the  documents)  to 
investigate  the  results  in  Boston.  After  carefully  going 
through  all  of  the  figures,  and  visiting  Boston  and  the  works, 
I  placed  the  present  value  of  all  the  Boston  gas  works  in 
1905,  so  far  as  they  were  used  and  useful,  at  about  $9,000,000. 

In  the  meantime  the  dispute  as  to  the  values  and  as  to 
prices  amongst  the  various  companies  in  Boston  resulted  in 
attempts  at  special  legislation  in  the  Massachusetts  Legis- 
lature from  all  sides  of  the  parties  in  dispute,  and  then  it  is 
said  the  Governor  of  the  State  sent  word  that  he  would  veto 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  55 

every  bill  introduced  in  the  Legislature  until  all  parties 
should  agree  upon  a  valuation  of  the  gas  works. 

Finally,  these  parties  being  thus  blocked  in  their  attempts 
to  over-reach  each  other,  agreed  upon  a  valuation  of  about 
$15,000,000  all  of  which  was  to  be  in  capital  stock  of  the 
Boston  Consolidated  Gas  Company. 

At  that  time  the  annual  sales  of  the  various  gas  companies 
in  Boston  amounted  to  3,000,000,000  cu.  ft.  and  this  meant  a 
capitalization  of  $5.00  for  each  1,000  cu.  ft.  annual  sales, 
which  appears  too  high. 

At  that  time  the  price  of  gas  in  Boston  was  $1.00,  but  the 
arbitrators  agreed  upon  90c.  per  1000  cu.  ft.  as  a  standard 
price  for  gas,  and  upon  7  per  cent  as  the  standard  rate  of 
dividend. 

Further,  they  agreed  that  for  each  five  cents  reduction  in 
the  price  of  1,000  cu.  ft.  of  gas,  the  Boston  Consolidated  Gas 
Company  should  be  allowed  to  increase  its  dividends  by  one 
per  cent  above  seven  per  cent. 

The  result  of  these  negotiations  was  that  in  1912  the  price 
of  gas  in  Boston  was  fixed  by  the  Company  at  80c.  and 
the  dividend  of  the  Boston  Consolidated  Gas  Company  was 
9  per  cent. 

In  England,  as  the  result  of  entire  and  pitiless  publicity 
and  of  vigilant  regulation,  the  first  issues  of  securities  are 
always  not  more  than  equal  to  and  often  less  than  the  actual 
investment  in  the  plant. 

In  Spokane  we  have  a  gas  works  whose  original  structural 
cost  was  about  $1,000,000  upon  which  the  gas  company  has 
placed  $1,345,000  in  5  per  cent  bonds,  $300,000  of  6  per  cent 
preferred  stock  and  $2,000,000  of  common  stock,  or  a  total 


56         PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

of  $3,645,000  securities  against  a  present  value  of  about 
$939,000. 

In  England  the  dividend  was  further  increased  1  per  cent 
for  each  8c.  reduction  in  the  price  of  gas,  and  in  Boston  the 
dividend  was  increased  1  per  cent  for  each  5c.  reduction  in 
the  price  of  gas. 

With  the  capitalization  of  the  Spokane  Gas  and  Fuel 
Company  as  it  is,  it  appears  to  be  quite  impossible  to  accept 
it  as  a  basis  for  computations. 

In  the  present  state  of  the  capitalization  of  the  company 
and  until  the  operating  expenses  of  this  company  and  the 
prices  paid  for  raw  material  and  productive  labor  have 
become  more  stable,  it  appears  to  be  impracticable  to  safely 
consider  the  establishment  of  a  sliding  scale. 

I  do  not  wish  to  be  understood  as  saying  that  a  sliding 
scale  is  impracticable,  but  to  be  understood  as  saying  that 
it  would  require  great  changes  in  this  company's  capitaliza- 
tion as  well  as  a  far  more  elaborate  consideration  of  the 
factors  involved  in  the  production  of  gas. 

SECTION  30. — RECAPITULATION. 

The  present  value  of  the  works  of  the  Spokane  Gas  and 
Fuel  Company  and  its  controlled  companies  appears  to  be 
$939,726.  Its  used  and  useful  investment  required  for 
193,109,700  cu.  ft.  1912  annual  sales  is  $597,732. 

It  is  almost  certain  that  with  the  price  of  gas  at  $1.20  per 
1,000  cu.  ft.  flat  or  with  the  stepped  rates  of  $1.40  and  $1.00 
the  total  annual  sales  will  increase  to  300,000,000  cu.  ft. 
within  a  year  or  eighteen  (18)  months  and  its  present  value 
of  $939,726  be  required  and  used. 

The  capacity  of  the  almost  idle  Lowe  Carburetted  Water 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  57 

Gas  set  is  nearly  sufficient  to  take  care  of  the  present  demands 
upon  this  company.  With  oil  at  4j^c.  or  perhaps  less,  the 
cost  of  oil  per  1,000  cu.  ft.  of  water  gas  would  be  about  20c. 
as  against  56.62  less  30. 8c.  residuals,  or  25. 8c.  net  for  coal 
per  1,000  cu.  ft.  for  coal  gas  with  less  labor  required  per 
1,000  cu.  ft.  manufactured.  A  probable  saving  of  5c.  per 
1,000  cu.  ft.  from  water  gas. 

The  fact  that  only  21,520  lineal  feet  of  a  total  of  666,824 
feet  of  street  mains  is  cast  iron  pipe  will  very  greatly  increase 
the  loss  by  depreciation  and  repairs  of  the  street  mains 
which  for  cast  iron  mains  is  nearly  nothing  and  for  wrought 
iron  mains  which  are  used  in  Spokane  for  all  the  rest  of  this 
system,  is  6  or  7  per  cent  annually. 

The  use  of  compressors  for  the  gas  renders  its  distribution 
more  costly  by  just  the  expense  of  compressing  it. 

By  a  proper  level  of  location  for  the  gas  works  it  would 
appear  to  have  been  possible  to  avoid  much  cost  for  pumping. 

Perhaps  very  good  excuses  might  be  given  for  some  of 
these  defects  in  engineering  construction  but  there  can  be  no 
excuse  for  the  relatively  enormous  expenditures  of  1912  in 
soliciting  new  business  and  at  the  same  time  keeping  the 
price  of  gas  at  $1.50  net  per  thousand. 

All  experience  proves  that  the  price  of  gas  is  the  controlling 
factor  in  its  sales,  and  that  reducing  the  price  of  gas  is  the 
first  requisite  in  increasing  its  sales  per  capita  or  what  is  the 
same  thing  increasing  the  total  annual  sales  in  a  city  with 
fixed  population. 

The  regimen  of  a  gas  works,  meaning  by  that  the  status 
of  the  costs  of  raw  material  and  productive  labor,  the  total 
sales  and  the  relations  of  fixed  and  proportional  operating 
expenses  to  each  other  vary  so  greatly  with  the  intelligence 


58  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

of  the  management  that  it  is  not  fair  either  to  the  Gas 
Company  or  to  the  public  to  fix  prices  for  any  considerable 
period  of  time  ahead. 

I  have  passed  over  the  item  of  working  capital  without 
comment  merely  fixing  it  at  $25,000;  since  the  items, 
meters  in  stock  and  gas  arc  lights  which  generally  are  in- 
cluded in  it  are  by  the  Washington  Public  Service  Com- 
mission Engineers  included  in  their  appraisement  of  assets 
$25,000  is  more  than  ample  to  cover  30  days'  requirements 
of  coal,  gas  oil,  payroll,  petty  cash,  etc. 

The  consumers'  deposits  of  cash  not  mentioned  here 
frequently  cover  a  considerable  part  of  the  free  cash  working 
capital  used  in  public  service  corporations. 

In  gas  monopolies  doing  a  cash  business,  there  is  never 
any  lack  of  credit  if  it  is  required  by  a  reputable  management. 

If  a  franchise  has  any  capitalization  value  the  City  should 
receive  it  from  the  Company  in  its  securities. 

In  the  case  of  older  cities  some  allowance  must  be  made 
for  street  pavements  lifted  and  replaced,  if  it  can  be  shown 
that  this  has  been  done  in  laying  new  mains,  but  in  so  new  a 
city  as  Spokane,  the  great  bulk  of  the  mains  are  down  before 
the  City  at  its  own  expense  lays  pavements  on  the  streets, 
over  them. 

In  case  of  repairs  the  cost  of  lifting  and  replacing  pave- 
ments very  properly  goes  into  operating  expense  and  so  to 
the  cost  of  gas  at  the  consumer's  meter. 

The  City's  pavements  act  as  a  barrier  to  possible  competi- 
tion with  the  present  Gas  Company  by  increasing  the  future 
cost  of  laying  street  mains;  but  as  a  gas  company  does  not 
own  its  ditch  or  any  specified  portion  of  a  street,  merely 
having  an  easement  in  it,  whose  locality  can  be  changed  by 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  59 

order  of  the  City's  officials,  it  does  not  appear  reasonable  or 
legal  for  it  to  claim  any  property  right  in  pavements  not 
paid  for  by  the  Gas  Company. 

The  cost  of  lifting  and  replacing  pavements  in  Spokane 
can  well  be  omitted  as  inconsiderable  and  probably  is  more 
than  covered  by  the  liberal  prices  for  street  main  work  fixed 
by  the  engineers  of  the  Washington  Public  Service  Com- 
mission. 

In  the  present  case  until  the  tangled  capitalization  of  the 

Spokane  Gas  and  Fuel  Company  is  uprooted  and  a  simpler 

form  of  capitalization  nearer  the  true  present  value  of  the 

plant  is  substituted  it  will  be  very  difficult  to  apply  the 

principle  of  the  London  Sliding  Scale  equitably  to  Spokane. 

The  stepped  rate  system  appears  to  be  free  from  the 

present  objections  to  the  London  Sliding  Scale,  and  to  offer  a 

more  equitable  range  of  prices  to  consumers  than  the  flat 

rate  does  and  to  encourage  manufacture   by  lower  rates. 

Very  respectfully, 

(Signed)  WILLIAM  D.  MARKS, 

Consulting  Engineer. 
To  HON  C.  M.  FASSETT, 

Commissioner  of  Public  Utilities, 
Spokane,  Washington. 


CHAPTER  III. 

RECAPITULATION  OF 

REPORT  UPON  THE  FAIR  AND  REASONABLE  PRICE  OF  A  6.6 
AMPERE  MAGNETITE  ARC  LIGHT  PER  YEAR. 

Through  the  courtesy  of  Messrs.  Stone  and  Webster  and 
their  consulting  engineers  an  appraisement  in  detail  by  the 
City  of  Minneapolis  was  not  necessary,  and  only  a  verifica- 
tion in  gross  was  made  of  the  appraisement  offered. 

From  this  appraisement  and  the  operating  expenses  of 
the  General  Electric  Company  for  1910  the  natural  law  of 
even  profit  prices  was  deduced  and  graphically  shown  in 
Diagram  1,  as  the  "even  profit  curve  of  prices." 

The  most  interesting  point  developed  is  that  owing  to  the 
small  amount  of  the  variable  expense  the  flat  monthly  maxi- 
mum use  rate  per  K.  W.  installed  from  0  hours  to  12  hours  per 
day  increased  only  from  $2.84  to  $3.40.  Without  any  steam 
plant  it  would  have  been  constant  regardless  of  hours  of  use. 

Water  power  plants  with  excess  power  could  therefore 
profitably  omit  K.W.  hour  meters  and  base  their  uniform 
rates  on  the  K.W.  capacity  of  a  consumer's  installation. 

No  assistance  was  required  in  this  report;  it  occupied 
33  days  and  cost  about  2,300,  and  saved  the  City  over 
$27,000  for  the  first  year. 

The  Minneapolis  General  Electric  Company  acceded  to 
the  $65  rate  deduced  and  after  one  year's  test  offered  to 
accept  $62.50  per  year  for  an  increased  number  of  street  arc 
lights  of  the  same  kind. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

TABLE  OF  CONTENTS 


61 


REPORT  UPON  THE  PRICE  OF  6.6  MAGNETITE 
ARC  LIGHTS. 


MINNEAPOLIS,  Dec.  2,  1911. 

SECTION  1.    Object  of  this  Report. 

SECTION  2.    General  Conditions. 

SECTION  3.    Financial  Condition  of  Company. 

Organization. 

Capitalization — Stocks,  Bonds. 

Sinking  Fund. 

Earnings,  Gross  from  1896  to  1911. 

Income— 1910-1911. 

Dividends  1899  to  1911. 

Franchise. 

The  City  of  Minneapolis. 

Railroads. 

Population. 
SECTION  4.    The  Cost  of  Electric  Power. 

Expenses  for  the  year  1910— $492,646.68. 

K.W.  hours  generated— 40,277,269. 

K.W.  hours  sold— 29,177,126. 

Total  operating  expenses  for  current. 

Variable  expenses,  cash — $54,511.33. 

Fixed  expenses,  cash  $463,992.82. 

Average  connected  load  1910 — 33,403  K.W. 

Daily  hours  of  operation  of  connected  load  2.845. 

City  electric  plant  valued  at  $3,500,000. 

Taylors  Falls  Hydro  Electric,  at  $3,000,000. 

Cessation  of  flow  in  the  Mississippi  River. 
SECTION  5.    Depreciation  and  Profits. 

Annual  depreciation,  $150,000. 

Annual  profit,  $520,000. 

Net  Earnings  of  Company,  1910,  $691,600.75. 


62 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


SECTION  6.    Sliding  Scale  of  Prices  for  Electricity. 

Cash  Operating  Expense,  Depreciation,  Complete  Opera- 
ting Expense  and  Price  for  Arc  Light  Current. 
Segregated  Departments  of  Connected  Load. 
Verification  of  Computation  of  Rates. 
SECTION  7.    Tabulation  of  Rates  for  Even  Profits. 
SECTION  8.    D.  C.  &  W.  B.  Jackson's  Method  of  Obtaining  the  Cost 

of  Current  0.879c.  per  K.W.  hour. 
Cost  per  Arc  Light,  $20.90. 
SECTION  9     The  Contract  between  Taylors  Falls  Plant  and  the  City 

Plant. 
SECTION  10.  The  Cost  of  Arc  Lights  for  1910  from  the  Company's 

Books  and  Records. 

Price  of  one  6.6  Ampere  Magnetite  arc  $65.68. 
Residual  Depreciation  $2.75. 
SECTION  11.  Regarding  Street  Lights  as  a  By-product  Furnished  Without 

Profit. 

Total  Cost  of  one  6.6  Ampere  Magnetite  $44.52. 

SECTION  12.  Regarding  Street  Arc  Lights  as  Furnished  at  the  Average 
Profit  Included  in  the  Price  of  the  Current  for  all 
Consumers  Price  $53.98. 
SECTION  13.  The  Supplemental  Steam  Plant. 
SECTION  14.  Extras  for  Incandescent  Lights  and  Arc  Lights. 

Extra  Cost  of  Incandescent  50  Watt  Carbon  Lamps  0.3c. 

per  K.W.  Hour. 

Present  investment  per  Arc  Light  $264.50. 
SECTION  15.  Practical  Difficulties. 

Comparison  of  Station  with  Auditorium,  Diagram 

1 — Curve  of  Prices  for  Even  Profit. 
SECTION  16.  Recapitulation. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          63 

REPORT  UPON  THE  FAIR  AND  REASONABLE  PRICE  OF  A  6.6 
AMPERE  MAGNETITE  STREET  ARC  LIGHT  PER  YEAR 
UNDER  THE  CONDITIONS  EXISTING  IN  THE  CITY  OF 
MINNEAPOLIS,  MINNESOTA,  BY  WM.  D.  MARKS,  CON- 
SULTING ENGINEER,  PARK  Row  BUILDING,  NEW  YORK 
CITY. 

SECTION  1.  Object  of  this  Report. — The  object  of  this 
report  is  to  determine  the  fair  and  reasonable  price,  or 
prices,  to  be  paid  by  the  City  of  Minneapolis  for  6.6  ampere 
magnetite  arc  lights  furnished,  erected  and  operated  in  the 
streets  of  the  city. 

SEC.  2.  General  Conditions. — The  question  of  the  proper 
price  to  be  charged  for  a  street  arc  light  of  the  character 
above  stated  admits  of  several  methods  of  treatment  and 
solution,  but  it  is  obvious,  as  in  all  other  matters,  there  is 
one  way  which  is  right  and  which  should  be  preferred,  and 
there  is  an  indefinitely  great  number  of  ways  which  are 
wrong,  approximating  more  or  less  nearly  to  the  one  right 
method. 

In  addition  to  the  selection  of  the  proper  and  judicially 
fair  method  of  solving  this  problem,  it  is  important  that  the 
exact  facts,  so  far  as  they  can  be  determined  from  practical 
operation  of  the  plant  in  any  locality,  shall  be  the  basis  of 
this  proper  method. 

In  the  present  case  we  have  not  an  electric  station  gen- 
erating electricity  solely  for  the  purpose  of  furnishing  street 
arc  lights  and  excluding  all  other  forms  of  electric  service, 
but  we  have,  on  the  contrary,  a  station  endeavoring  to  fur- 
nish electric  service  in  all  its  forms,  such  as  incandescent, 
house  and  street  lighting,  motive  power  service  from  as 
large  a  unit  as  2,500  H.P.  down  to  a  motor  of  only  a  fraction 


64  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

of  a  H.P.  and  also  street  arc  lighting  such  as  is  proposed 
above. 

Besides  the  complication  of  this  multifarious  service,  the 
Minneapolis  General  Electric  Company  has  had  as  its  sources 
of  power  the  Hydro-Electric  Station  upon  the  St.  Croix 
river,  40  miles  away,  and  conveying  electricity  to  Minne- 
apolis by  means  of  a  pair  of  high  tension  lines,  and  as  a 
further  source  of  power  in  emergencies  it  had  a  local  steam 
plant  within  the  limits  of  the  city  of  Minneapolis  of  6,000 
to  7,000  K.W.  capacity  in  1010. 

There  is  no  doubt  of  the  necessity  of  this  supplemental 
steam  capacity,  since,  during  the  present  month,  a  sudden 
Arctic  gale  and  a  freezing  temperature  coming  together, 
caused  an  almost  complete  cessation  of  the  flow  of  the 
Mississippi  river  at  Minneapolis,  and  also  very  largely 
diminished  the  flow  of  the  St.  Croix  river  at  Taylors  Falls. 

While  such  a  vagary  as  this  will  not  cause  great  incon- 
venience to  a  factory  or  a  mill  which  can  shut  down  for  a 
day  or  two  without  great  loss,  it  is  fatal  to  the  usefulness  of 
an  electric  lighting  plant,  which  must  be  prepared  at  every 
instant  to  generate  and  to  deliver  whatever  electricity  may 
be  demanded  by  its  consumers. 

When  considering  the  fixing  of  prices  to  be  charged  for 
each  of  the  different  departments  into  which  the  sales  of  the 
electric  supply  is  divided  in  a  public  service  corporation 
supplying  all  forms  of  electricity  required  by  the  city,  it  is 
necessary  to  at  once  recognize  and  accept  the  fact  that  the 
method  of  averages  is  the  only  one  which  can  be  used. 

Following  naturally  along  the  process  of  manufacture  we 
realize  that  the  generating  station  supplies  and  distributes  a 
great  pool  or  store  of  electricity  which  is  drawn  upon  as  from 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  65 

a  common  fund,  for  the  purpose  of  incandescent  lighting, 
motive  power,  street  lighting  or  heating,  and  it  is  perfectly 
natural  to  assume  that  the  average  cost  of  this  electricity  is 
the  same  to  all  consumers  and  that  motive  power  requiring 
only  its  admission  to  the  motor  will  be  dealt  with  fairly  if 
only  charged  the  profitable  price  at  which  electricity  can  be 
furnished  from  the  common  fund.  (See  diagram.) 

On  the  other  hand,  incandescent  lighting  requires  incan- 
descent lamps,  and  to  the  cost  of  the  power  current  should 
be  added  the  cost  of  the  incandescent  lamps  used. 

In  the  same  way  for  arc  lighting,  to  the  cost  of  the  power 
current  should  be  added  such  extras  as  the  special  operating 
labor,  carbons  or  electrodes  and  the  maintenance  of  the 
same. 

Thus  it  appears  as  if  in  order  to  get  the  proper  price  for 
street  arc  lighting,  we  should  obtain  the  cost  of  the  power 
current  per  K.W.  hour,  in  which  should  be  included  the 
average  cost  due  to  the  residual  depreciation  of  the  plant 
after  all  repairs  are  made  as  well  as  is  possible.  When  this 
cost  per  K.W.  hour  of  the  common  store  of  electricity  is 
obtained,  it  should  then  have  added  to  it  such  extras  as 
arise  from  the  peculiarities  of  the  street  arc  lighting,  and 
also  a  fair  and  reasonable  profit  upon  the  investment  required 
for  arc  lighting. 

In  distributing  electricity  for  all  purposes,  it  is  obvious 
that  poles  and  underground  conduits  thus  used  can  con- 
veniently be  used  in  part  also  for  the  street  arc  lighting 
system,  and  therefore  somewhat  reduce  the  cost  of  the 
investment  required  to  erect  the  arc  lamps  wherever  they 
may  be  desired. 

The  officials  of  the  Minneapolis  General  Electric  Company 


66  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

have  furnished  me,  upon  request,  such  data  as  I  have  asked 
from  their  books  of  account,  and  also  such  physical  data 
regarding  the  operation  of  the  plant  as  I  have  requested. 

In  addition  to  this,  they  have  placed  in  my  hands  a  most 
elaborate  and  exhaustive  report  made  by  the  Messrs. 
Jackson,  consulting  engineers  of  Chicago,  which  I  am  told 
has  occupied  their  time  and  that  of  a  dozen  assistants  for  a 
couple  of  months  or  more,  and  further  that  they  have  been 
furnished  by  this  company's  employes  with  all  of  the  data 
as  to  cost,  both  for  machinery  and  plant  and  operation, 
to  any  extent  which  they  may  require. 

Upon  examining  this  report,  I  have  found  myself  obliged 
to  differ  from  it,  more  particularly  as  to  methods. 

It  is  proper  for  me  to  say  that,  judging  from  the  internal 
evidence,  the  work  of  appraisement  done  by  the  Messrs. 
Jackson  has  been  most  conscientiously  and  thoroughly 
carried  out  in  the  minutest  detail,  and  results  in  a  valuation 
per  street  arc  light  from  which  I  do  not  largely  differ,  but 
when  it  comes  to  estimating  the  cost  of  the  current,  these 
engineers  have  accepted  and  used  a  contract  said  to  exist 
between  the  Taylors  Falls  plant  and  the  City  of  Minneapolis 
plant,  which  fixes  the  price  of  all  power  delivered  at  Station 
"A"  in  Minneapolis  at  $18  per  ampere  capacity  demanded, 
and  also  0.4  cent  per  K.W.  hour  measured. 

Taking  the  figures  of  1910,  this  raises  the  basic  cost  of 
current  to  the  City  of  Minneapolis  plant  from  about  $55,000 
to  nearly  $400,000  for  the  variable  cost  of  current  rising  and 
falling  with  the  amount  of  current  delivered. 

The  operating  expenses  for  the  year  1910  furnished  to  me 
by  the  Minneapolis  General  Electric  Company  included 
the  operating  expenses  both  at  Taylors  Falls  and  in  the  City 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  67 

of  Minneapolis,  and  I  have  therefore  been  able  to  give  you 
the  underlying  facts  as  to  the  cost  of  current,  regardless  of 
the  interposition  of  this  artificial  method  by  contract  of 
raising  the  apparent  cost  of  current  to  the  Minneapolis 
plant. 

Returning  now  to  the  question  of  averages,  I  would  say 
that  when  we  contemplate  a  detailed  investigation  of  each 
department  of  an  electric  company  it  will  at  once  be  recog- 
nized that  the  detail  of  real  estate,  buildings,  machinery 
and  of  the  ducts,  poles,  wires  and  multifarious  operatives  of 
a  distribution  plant  of  such  a  company  is  almost  too  intricate 
to  admit  of  analysis  by  the  human  mind.  Carried  to  the 
extreme  of  analysis,  we  at  once  recognize  the  fact  that  each 
light,  each  motor  would,  under  such  conditions,  have  its 
separate  rating  as  to  cost  and  price  of  electricity.  For  this 
reason,  in  commercial  practice  it  is  necessary  by  some  method 
to  use  averages  of  the  cost,  and  the  question  to  be  decided 
is,  at  what  point  must  the  segregation  of  departments  cease  and 
averages  be  used  in  fairness  alike  to  both  the  company  and  the 
consumer  of  electricity '? 

Recognizing  the  practical  futility  of  such  an  attempt  to 
segregate  the  investments  in  plant  or  each  department,  or, 
except  in  a  general  way  for  any  one  department,  I  have 
computed  the  complete  cost  of  electricity  in  the  common 
pool  or  fund  and,  taking  so  much  of  it  as  is  required  for 
each  department  at  the  average  price  resulting,  have,  by  a 
careful  consideration  of  the  actual  extras  resulting  from 
the  peculiar  demands  of  arc  lighting,  endeavored  to  fix  a 
fair  and  reasonable  price  for  a  single  arc  light  for  one  year. 

With  8  per  cent  profit  on  the  actual  investment,  this  price 
appears  to  be  $65.68,  with  a  lump  profit  of  $21.16  on  each 


68  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

arc,  as  will  presently  be  shown.  The  actual  cost  of  this 
light  without  any  profit  at  all  appears  to  be  $44.52;  and  if 
we  allow  a  profit  on  the  current  only,  the  price  appears  to 
be  $53.98,  with  a  profit  on  each  light  of  $9.46. 

As  may  be  inferred  from  what  goes  before,  it  will  be 
found  that,  according  to  the  point  of  view  taken  and  the 
method  pursued,  a  number  of  different  prices  will  result 
for  the  arc  lights  (or  for  that  matter  for  any  other  form  of 
lighting),  and  the  price  to  be  fixed  upon  for  any  given  arc 
light  must  be  that  in  which  the  method  used  in  reaching  it 
appears  to  be  the  nearest  to  a  judicially  fair  and  reasonable 
return  upon  the  investment,  which  in  this  case  happens  to 
have  been  fixed  by  the  committee  of  City  Councils  at  8  per 
cent. 

SEC.  3.  Financial  Condition  of  the  Minneapolis  General 
Electric  Company. — This  company  has  been  claiming  a  rate 
of  $84  per  arc  light,  but  the  city  has  fixed  the  rate  till  within 
a  short  time  at  $70  per  street  arc  light  and  has  paid  this  rpice, 
the  company  receipting  for  it  on  account. 

Recently  this  $70  price  has,  by  action  of  the  City  Council, 
been  reduced  to  $65  for  each  6.6  ampere  magnetite  arc  light. 

To  make  a  thorough  and  exact  appraisement  of  the  prop- 
erty of  this  company  would  require  a  dozen  employes  and 
three  to  six  months'  time. 

To  make  a  thorough  audit  of  the  books  and  accounts  of 
this  company,  verify  check  stubs  and  vouchers,  would  re- 
quire an  equal  number  of  accountants  and  length  of  time, 
at  the  very  least,  and  cost  many  thousands  of  dollars. 

In  making  an  estimate  of  the  present  value  of  these 
plants,  I  have  been  guided  by  such  information  as  to  costs 
in  a  general  way  as  I  have  gathered  elsewhere  in  my  pro- 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  69 

fessional  labors,  and  I  have  accepted  for  the  year  1910  the 
structural  cost  of  the  Taylors  Falls  plant  to  Station  "A" 
at  $3,000,000,  and  I  have  also  estimated  by  analogy  the 
present  value  (1910)  of  the  city  plant  within  the  limits  of 
Minneapolis,  at  about  $3,500,000.  The  total  valuation, 
then,  amounts  to  $6,500,000  present  value  (1910). 

In  my  work  I  have  not  made  use  of  any  of  the  figures  for 
1911,  but  should  add  that  since  the  fire  of  January  6,  1911, 
this  company  has  completed  a  steam  station  known  as  the 
Riverside  Station,  having  12-thousand  K.W.  nominal 
capacity,  and  has  rebuilt  its  Main  Street  Station,  burned 
down,  as  a  central  distributing  station. 

Both  of  these  stations  are  up  to  the  most  advanced  state 
of  the  art  of  generating  and  manipulating  electricity,  and 
place  the  company  in  a  much  better  position  than  it  was 
before  the  fire  occurred. 

The  organization  of  the  company  and  its  business  manage- 
ment appear  to  be  good,  but  the  most  important  factor  in  its 
future  financial  prospects  is  the  irresistible  tide  of  growth  of 
wealth  and  of  progress  in  manufacturing  setting  in  upon 
Minneapolis,  which  renders  it  only  necessary  that  this 
company  shall  avail  itself  of  its  opportunities  to  render  it 
immensely  valuable  and  profitable  to  its  owners. 

The  best  method  of  placing  before  you  the  views  of  these 
owners  is  an  open  letter  from  Messrs.  Stone  &  Webster, 
dated  October  2,  1911,  which  is  subjoined. 

"Dear  Sirs:  We  submit  the  following  particulars  re- 
garding the  $1,000,000  first  mortgage,  30-year,  5  per  cent 
gold  bonds,  due  December  1,  1934,  of  the  Minneapolis 
General  Electric  Company,  which  you  have  purchased,  and 
of  the  company's  condition. 


70          PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

ORGANIZATION. 

"The  Minneapolis  General  Electric  Company  is  organ- 
ized under  the  laws  of  the  State  of  New  Jersey,  and  does  the 
entire  electric  lighting  and  power  business  in  the  City  of 
Minneapolis,  Minnesota.  It  also  does  the  lighting  and  power 
business  in  several  smaller  towns  adjacent  to  Minneapolis. 
It  owns  all  of  the  bonds  and  stock  of  the  companies  which 
have  developed  the  water  power  on  the  St.  Croix  river  to  the 
extent  of  20,000  H.P.,  with  an  ultimate  development  of 
25,000  H.P. 

CAPITALIZATION. 

Authorized  Issued 

Stocks:     Common  stock  (paying  dividends 
quarterly)  at  the  rate  of  7  per  cent  per 

annum $3,375,000        $3,375,000 

Preferred  stock  (6  per  cent  cumulative) .  .       1,000,000          1,000,000 

Bonds:   of  First  mortgage,    30-year,    gold 
bonds  due  Dec.  1,  1934,  callable  at  110 

and  interest  on  any  interest  day 8,000,000        *6,747,000 

*Including  the  bonds  sold  to  you. 

"Sinking  Fund:  1  per  cent  per  annum  of  bonds  issued, 
payable  April  1,  and  waivable  until  1912. 

"  Note :  The  issued  bonds  bear  interest  at  the  rate  of  5  per 
cent  per  annum,  but  the  authorized  and  unissued  bonds  may 
bear  interest,  at  a  lower  rate,  as  determined  by  the  Board  of 
Directors. 

"The  bonds  are  dated  December  1,  1904,  are  due  De- 
cember 1,  1934.  Interest  is  payable  June  1  and  December  1, 
at  the  office  of  the  Old  Colony  Trust  Company,  Boston, 
Trustee. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  71 

"The  unissued  bonds  are  reserved  in  the  hands  of  the 
trustees  and  can  be  issued  only  for  permanent  additions  and 
improvements  at  not  exceeding  80  per  cent  of  the  cash  cost 
of  such  additions  and  improvements. 

"Of  the  above  common  stock,  $2,875,000  has  been  issued 
within  the  past  two  years,  all  at  par,  $100  per  share. 

SECURITY. 

"These  bonds  are  secured  by  a  first  mortgage  upon  all 
the  property,  rights  and  franchises  now  owned,  and  which 
may  hereafter  be  acquired,  by  the  Minneapolis  General 
Electric  Company  in  the  City  of  Minneapolis,  Minnesota. 
This  property  comprises  a  complete  electric  lighting  and 
power  system,  entirely  covering  the  city,  the  power  being 
generated  both  by  steam  and  water.  The  distribution  sys- 
tem is  ve*ry  complete,  the  sub-stations  being  of  ample  ca- 
pacity and  all  of  the  wires  in  the  principal  business  portions 
of  the  city  being  underground.  Through  the  ownership  of 
all  of  the  stock  and  bonds  of  the  St.  Croix  Falls  (Minnesota) 
Improvement  Company,  which  securities  are  held  by  the 
Old  Colony  Trust  Company,  as  trustee,  these  bonds  are 
practically  a  first  mortgage  on  the  water  power  at  St.  Croix 
Falls  on  the  St.  Croix  river  already  developed  by  these  two 
companies  to  the  extent  of  20,000  H.P.,  the  ultimate  de- 
velopment being  more  than  25,000  H.P. 

"The  power  generated  at  St.  Croix  Falls  is  conveyed  to 
Minneapolis,  a  distance  of  about  40  miles,  by  a  duplicate 
transmission  line  or  private  right  of  way  60  feet  in  width, 
also  owned  by  the  above  mentioned  company. 


72  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

"The  cost  of  completing  this  development  will  be  only  for 
water  wheels  and  electrical  apparatus,  the  hydraulic  con- 
struction being  already  finished. 

"The  steam  station  in  the  City  of  Minneapolis  was  de- 
stroyed by  fire  in  January,  1911.  A  new  station  has  been 
built  on  a  new  site,  two  miles  distant  from  the  center  of  the 
city,  well  located  on  the  bank  of  the  Mississippi  river  and 
served  directly  by  a  railway  connection.  The  land  selected 
is  of  ample  size  for  all  future  requirements.  A  thoroughly 
modern  steam  station  of  16,000  H.P.  capacity  has  been 
completed  and  is  now  in  operation,  at  a  cost  of  approximately 
$1,000,000,  the  transmission  lines  from  this  station  to  the 
center  of  distribution  being  entirely  underground.  The 
high  efficiency  expected  of  this  station  will  undoubtedly 
serve  to  improve  the  company's  earnings. 

"In  addition  to  the  water  power  at  St.  Croix  Falls  and  the 
steam  station  above  referred  to,  the  company  owns  a  second 
water  power  station  in  Minneapolis  at  St.  Anthony's  Falls, 
having  a  capacity  of  more  than  1,000  H.P.,  and  also  owns 
a  small  station  of  a  capacity  of  800  H.P.,  in  connection  with 
one  of  its  sub-stations  in  the  center  of  the  city.  A  storage 
reservoir  on  the  St.  Croix  river  above  Taylors  Falls  is  also 
owned  by  the  company. 

EARNINGS. 

Gross  earnings  for  years  ending  December  31 : 

1897 $253,013.23  1906 $805,632.46 

1899 284,053.87  1907 920,606.53 

1901 405,634.03  1908 1,008,415.35 

1903 558,044.64  1909 1,108,756.36 

1905 724,581.91  1910 1,276,041.02 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  73 

INCOME  ACCOUNT. 

Report  for  12  Months  Ending 
July  31,  1911   July  31,  1910       Increase 

Gross  earnings $1,384,888.47  $1,191,341 .87    $193,546.60 

Operating  expenses  (includ- 
ing taxes) 639,897 . 24       557,642 . 12       82,255 . 12 

Net  earnings $744,991.23     $633,699.75   $111,291.48 

Interest  charges 300,046 . 19       290,107 . 66         9,938 . 53 

Balance $444,945 . 04     $343,592 . 09   $101,352 . 95 

Bond  sinking  fund 21,153.33   21,153.33 

$423,791.71       $343,592.09      $80,199.62 

"As  seen,  the  company's  earnings  have  increased  rapidly. 
At  the  present  time  more  than  30  per  cent  of  the  gross  earn- 
ings are  from  commercial  power,  and  this  proportion  is 
rapidly  increasing.  The  city  lighting  represents  less  than 
10  per  cent  of  the  company's  gross  earnings.  During  the 
past  year  a  number  of  large  contracts  for  wholesale  power 
have  been  made,  the  largest  being  with  the  City  of  Minne- 
apolis for  pumping  purposes.  For  this  more  than  2,500  H.P. 
will  be  used. 

DIVIDENDS. 

"The  company  has  paid  dividends  of  6  per  cent  per 
annum  on  its  preferred  stock  continuously  since  August  1, 
1899,  and  has  paid  dividends  on  its  common  stock  of  4  per 
cent  from  February  1,  1906,  to  August  1,  1909,  and  of  6  per 
cent  to  May  1,  1910,  and  since  that  date  dividends  have  been 
paid  at  the  rate  of  7  per  cent  per  annum. 

FRANCHISES. 

"The  franchises  owned  by  the  company  were  originally 
granted  to  separate  companies  which  were  afterwards  con- 


74  PRACTICAL  BATE  MAKING  AND  APPRAISEMENT 

solidated  to  form  the  present  company.  In  addition,  the 
company  owns  a  great  many  permits  granted  directly 
to  it  by  the  city  from  time  to  time,  covering  extensions  of 
its  lines.  These  franchises,  under  which  the  company  has 
operated  satisfactorily  since  its  organization  in  1899,  have 
been  the  subject  of  negotiations  between  the  city  and  the 
company,  with  the  view  of  substituting  a  general  franchise, 
limited  in  duration,  in  place  of  the  several  existing  franchises. 
This  franchise  situation  you  are  entirely  familiar  with. 

THE  CITY  OF  MINNEAPOLIS. 

"  Minneapolis,  the  largest  city  of  the  Northwest,  is  located 
at  St.  Anthony's  Falls  on  the  Mississippi  river.  It  is  the 
center  of  a  rich  agricultural  district  and  the  natural  gate- 
way for  the  products  of  the  western  portion  of  Wisconsin, 
all  of  Minnesota,  North  Dakota,  the  eastern  half  of  South 
Dakota,  and  Northern  Iowa.  The  advantage  afforded  by 
the  Falls  of  St.  Anthony  and  the  excellent  transportation 
facilities  have  been  the  great  factors  in  the  industrial  de- 
velopment of  Minneapolis. 

"Minneapolis  is  the  largest  flour  manufacturing  city  and 
grain  market  in  the  world.  Many  other  industries  are  lo- 
cated in  the  city,  including  the  manufacture  of  agricultural 
implements,  machinery,  carriages,  wagons,  furniture  and 
shoes. 

RAILROADS. 

"The  transportation  facilities  are  excellent,  the  city  being 
served  by  ten  trunk  lines:  Chicago,  Milwaukee  &  St.  Paul; 


Year 
1880  census  

Rank 
37 

Population 

46,887 

1890  census        .  . 

17 

164,738 

1900  census 

19 

202,718 

1910.  . 

301.408 

PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  75 

Chicago  &  Northwestern;  Minneapolis  &  St.  Louis;  Wis- 
consin Central;  Great  Northern;  Northern  Pacific;  Chicago 
&  Great  Western;  Chicago,  Burlington  &  Quincy;  Minne- 
apolis, St.  Paul  &  Sault  Ste.  Marie,  and  the  Chicago,  Rock 
Island  &  Pacific.  Six  of  these  railroads  have  terminals  in 
the  city. 

POPULATION. 

Per  Cent 

252 
24 
50 

LEGALITY. 

"The  legal  status  of  the  affairs  of  the  Minneapolis  Gen- 
eral Electric  Company,  and  the  validity  of  the  issues  of  its 
securities,  have  been  examined  by  the  Messrs.  Tyler  & 
Young,  attorneys,  of  Boston. 

Very  truly  yours, 

"STONE  &  WEBSTER." 

SEC.  4.  The  Cost  of  Electric  Power. — For  the  reason  that 
the  fire  of  1911  not  only  inflicted  considerable  damage  (largely 
covered  by  insurance)  upon  the  company,  but  also,  as  in  the 
case  of  all  fires,  added  to  this  visible  damage  a  considerable 
amount  of  consequential  damage,  felt  principally  in  the  cost 
of  operation,  I  have  chosen  to  take  the  operating  expenses 
for  the  year  1910,  as  furnished  by  this  company,  as  the  basis 
of  my  investigation  of  the  cost  of  current. 


76  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

THE  MINNEAPOLIS  GENERAL  ELECTRIC  Co. 
Expenses  for  Year  of  1910 

Power  plant  wages  (fixed) $33,530. 91 

Fuel  for  power  (variable) 33,947 . 99 

Water  for  power  (variable) 388 . 00 

Lubricants  and  waste  (variable) 1,861 .54 

Miscellaneous  supplies  and  expenses  (fixed) . . .  2,846 . 99 

Hired  power  from  St.  Anthony  Falls  (variable) .  18,313 . 80 


Total  operating $90,889.23 

Boilers  (fixed) $139. 83 

Engines  (fixed) 294.32 

Electric  plant  (fixed) 2,571 . 79 

Miscellaneous  station  equipment  (fixed) 2,134.50 

Buildings  and  fixtures  (fixed) 1,497 . 26 

Dams,  canals  and  tail  races  (fixed) 886 . 95 

Gates,  wheels  and  governors  (fixed) 1,450.98 


Total  maintenance $8,975 . 63 

Total  cost  of  manufacture 99,864 . 86 

Automobiles  (fixed) $4,532.27 

Operating  arc  lamps  (omitted) 34,192. 16 

Operating  meters  (fixed) 12,058. 90 

Renewal  of  incandescent  lamps  (omitted) ....  25,470 . 84 

Operating  sub-stations  (fixed) 8,870. 28 

Miscellaneous    distribution    of    operating    ex- 
penses (fixed) 6,450.87 


Total  operating $91,575 . 32 

Underground  system  (fixed) $4,968.07 

Overhead  system  (fixed) 36,102.27 

Arc  lamps  (omitted) 6,273 . 12 

Meters  (fixed) 7,854.94 

Forward,  $55,198.40 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  77 

Brought  Forward,     $55,198.40 

Customers '  repairs  and  renewals  (fixed) 32,076 . 47 

Sub-stations  (fixed) 12,744.07 


Total  maintenance $100,018.94 

Total  cost  of  distribution 191,594.26 

Salaries  of  general  officers  (fixed) $42,217.61 

Salaries  of  clerks  (fixed) 26,148.09 

Printing  and  stationery  (fixed) 8,385.51 

Storeroom  expenses  (fixed) 4,508 . 85 

Miscellaneous    general    expenses    and    office 

sundries  (fixed) 32,511 .06 

Legal  expenses  (fixed) 6,954.30 

Rent  of  offices  (fixed) 7,410.49 

Insurance  (fixed) 8,430.40 

Logging  expense  (fixed) 9,361 . 81 

Advertising,  canvassing  and  soliciting  (fixed) .  .  55,259.44 


Total  general  expenses  of  Light  and  Power 

Dept $201,187.56 

Total  all  expenses 492,646.68 

K.W.H.  generated  and  purchased 40,277,269 

K.W.  hours  sold 29,177,126 

The  year  1910  will  give  us  a  more  nearly  uniform  regimen 
and  approximate  more  closely  to  fair  costs  than  1911  or 
any  part  of  it. 

Referring  to  the  operating  expenses  given  above  as  they 
happen  to  come  from  the  books  of  the  company,  I  would 
call  your  attention  to  the  fact  that  they  are  divided  into  two 
classes.  The  first,  or  variable  class,  are  those  expenses 
which  rise  and  fall  with  the  increase  and  decrease  of  the 
commodity  (electricity)  delivered.  The  second  class  is 
the  fixed  operating  expenses,  which  take  upon  themselves 


78  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

the  nature  of  a  service  rendered  each  day  by  the  staff  of 
employes  and  by  the  investment  of  the  corporation. 

Upon  reflection  it  will  be  understood  at  once  that  no 
matter  whether  the  amount  of  electricity  delivered  in  any 
day  is  great  or  small,  the  staff  of  employes  are  there  drawing 
their  pay  and  the  investment  is  requiring  allowances  for 
profit  and  for  depreciation. 

It  will  at  once  be  perceived  that  it  makes  no  difference 
in  this  fixed  operating  expense  for  the  day  whether  the  sta- 
tion be  loaded  to  its  full  capacity  the  whole  day  or  whether 
it  be  almost  idle,  the  investment  is  there  and  the  staff  of 
employes  is  there.  With  the  increase  or  the  decrease  of 
the  load  only  the  variable  expenses  rise  or  fall. 

In  steam  stations  these  variable  expenses  are  the  fuel,  the 
oil  and  waste,  water  for  steam,  if  it  is  bought,  and,  should 
there  be  a  tax  upon  the  gross  earnings,  this  tax. 

In  the  hydro-electric  station  operated  wholly  by  water  it 
may  almost  be  said  that  the  variable  expenses  do  not  exist, 
provided  there  is  always  water  enough  to  carry  the  load  and 
no  supplementary  steam  station  is  required  for  any  reason. 

For  the  reasons  stated  above,  it  is  at  once  apparent  that 
so  far  as  the  source  of  electric  power  is  concerned,  the 
Minneapolis  General  Electric  Company  is  the  possessor  of  a 
mixed  steam  and  water  station.  I  have  therefore  rearranged 
and  divided  the  operating  expenses  for  the  year  1910  as 
subjoined. 

29,177,126  K.W.  hours  sold. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          79 

MINNEAPOLIS  GENERAL  ELECTRIC  COMPANY. 
Annual  Expenses 

Expenses  variable  with  power  sales : 

Fuel  for  power $33,947 . 99 

Water  for  power 388.00 

Lubricants  and  waste 1,861.54 

Hired  power 18,313 . 80 

$54,511.33 
Expenses  temporarily  fixed: 

Power  plant  wages $33,530.91 

Miscellaneous    supplies     and     ex- 
penses   2,846.99 

Maintenance  boilers 139 . 831 

Maintenance  engines 294 . 32 

Maintenance    electric    plant    (ma- 
chinery)   2,571.79 

Maintenance  miscellaneous  station 

equipment 2,134 . 50 

Maintenance  buildings  and  fixtures.  1 ,497 . 26 
Maintenance  dams,  canals  and  tail 

races 886.95 

Maintenance    gates,    wheels    and 

governors 1,450. 98 

Automobiles 4,532.27 

Operating  meters 12,058.90 

Operating  sub-stations 8,870.28 

Miscellaneous  distribution  operat- 
ing expense 6,450 . 87 

Underground  system 4,968.07 

Overhead  system 36,102.27 

Meters 7,854.94 

Customers'    repairs   and   renewals 

(?)  free 32,076.47 

Sub-stations 12,744.07 

Salaries  of  general  officers 42,217.61 

Forward,  $213,229.28     $54,511.33 


80  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Brought  Forward,  $213,229.28      $54,511.33 

Salaries  of  clerks 26,148.09 

Printing  and  stationery 8,385.51 

Storeroom  expenses 4,508 . 85 

Miscellaneous  general  expenses  and 

office  sundries  (?) 32,511 . 06 

Legal  expenses 6,954 . 30 

Rent  of  offices 7,410.49 

Insurance 8,430.40 

Logging  expense 9,361 . 81 

Advertising,  canvassing  and  solicit- 
ing (?) 55,259.44 

-   $372,199.23 
Taxes 91,793.59 


Total   operating  expenses  for 

current $518,504. 15 

Omitted  operating  expenses: 

Operating  arc  lamps $34,192. 16 

Maintenance  arc  lamps 6,273 . 12 

$40,465.28 
Renewal  of  incandescent  lamps. . .  .  25,470 . 84 


$584,440.27 
Variable  expense: 

$54,511 .33  div.by  29,177,126  K.W.H.0. 187c.  per  K.  W.  H. 
Fixed  expense: 

$463,992 . 82  div.by  29, 177, 126  K. W.H.  1 . 590c.  per  K. W.H. 


Total  cash  operating  cost  for  current 

only  at  meter 1 . 777c.  per  K.W.H 

The  average  connected  load  for  1910  is  given  as  33,403 
K.W.,  as  per  Table  1. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          81 

REPORTED  CONNECTED  LOAD  FOR  MINNEAPOLIS  GENERAL 
ELECTRIC  COMPANY,  YEAR  1910. 

January 30.315   K.W. 

February 30.466 

March 30.794 

April 31.272       « 

May 32.344       « 

June 33.168 

July 33.947       « 

August 34.723 

September 34.926 

October 35.569 

November 36.381 

December 36.927 

Total 400.832       " 

Average 33.403 

Annual  hours  operation  of  connected  load: 
29,177,126  K.W.  hours  divided  by  33,403  K.W.  873.49    hours 
Daily  hours  (divide  by  307  days) 2.845  hours 

About  the  end  of  1907  Messrs.  D.  C.  and  Wm.  B.  Jackson 
made  the  "total  cost  of  labor  and  material  in  system,  ex- 
clusive of  land  and  supplies,  $3,037,777,"  but  did  not,  ap- 
parently, depreciate  it  to  its  present  value. 

I  may  be  pardoned  for  saying  that  such  appraisement  re- 
sembles the  valuation  of  a  scrap  heap  at  the  price  of  the  new 
machinery  from  which  it  came,  for  much  of  the  machinery 
was  old-fashioned  and  of  approximately  scrap  value,  in  1908. 

The  Minneapolis  General  Electric  Company  states  that 
since  the  beginning  of  1908  the  following  additions  have  been 
made  to  the  Minneapolis  city  plant : 

November  1,  1907,  to  January  1,  1910 $860,000.00 

January  1,  1910,  to  January  1,  1911 _      363,000.00 

$1,223,000.00 


82  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Taking  the  fact  that  the  approximate  $3,000,000  appraise- 
ment of  the  Messrs.  Jackson  for  value  of  machinery  and  pro- 
ductive labor  was  not  the  depreciated  value,  but  the  original 
structural  cost  for  material  and  labor,  and  further  that  this 
company's  property  was  an  accumulation  of  the  properties 
and  machinery  of  several  old  and  unsuccessful  electric  com- 
panies, it  appears  to  me  liberal  and  fair  to  adopt  $3,500,000 
as  the  basis  of  computation  of  rates. 

To  ascertain  the  exact  truth  as  to  the  1910  value  of  the 
city  plant  of  the  Minneapolis  General  Electric  Company,  it 
will  be  necessary  to  have  both  a  thorough  audit  of  its  books 
and  a  detailed  appraisement  of  the  1910  condition  and  value 
of  the  whole  plant. 

As  a  good  deal  of  this  plant  is  burned  up,  this  latter  re- 
quirement is  not  possible,  and  I  am  forced  to  ask  you  to 
accept  a  valuation  which  in  my  opinion  is  very  liberal  to  the 
company,  but  which  cannot  now  be  proved  for  1910. 

The  1910  tax  assessment  for  this  city  plant  is  given  as 
$1,923,445,  covering  real  and  personal  property,  and  the 
estimated  $3,500,000  investment  gives  per  K.W.  connected 
load  (33,403)  about  $105. 

If  any  question  of  1911  value  arises,  I  would  say  that  until 
the  books  of  this  corporation  are  completely  audited  from 
the  vouchers  and  check  stubs  to  the  general  ledger  no  one 
can  learn  how  many  dollars  have  been  invested  in  this  plant 
or  otherwise  appropriated  by  this  company,  and  the  $3,500,- 
000  estimated  by  me  for  1910  is  but  an  opinion  based  on 
facts  learned  elsewhere,  and  a  rapid  general  inspection  of  the 
plant  of  the  Minneapolis  General  Electric  Company  in 
Minneapolis. 

As  to  the  percentages,  10  per  cent,  one-half  of  1  per  cent, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  83 

7J/2  per  cent,  6  per  cent  and  8  per  cent,  successively  added 
to  the  Jackson's  appraisement,  1907,  it  will  be  necessary  to 
verify  these  assumptions  from  the  books  and  then  decide 
(if  they  are  found  to  exist)  whether  they  are  fair  and  just 
charges  allowable  upon  the  property,  and  also  by  appraise- 
ment to  learn  the  decay,  inadequacy  and  obsolescence  to 
be  deducted  from  the  structural  cost  of  the  new  plant. 

The  investment  outside  the  city  limits  known  as  the  Tay- 
lors Falls  hydro-electric  plant  is  given  as  about  $3,000,000 
(1910).  I  have  had  no  means  of  investigating  its  details 
but  am  inclined  to  believe  this  plant  worth  all  of  that  sum. 

At  Taylors  Falls  are  installed  six  generators  of  2,500  K.W. 
capacity,  or  15,000  K.W.  capacity.  Two  more,  adding 
5,000  K.W.,  are  to  be  added  shortly,  making  20,000  K.W. 
there. 

At  Nevers  Dam  can  be  installed  10,000  K.W.  capacity 
when  a  dam  30  feet  high  is  completed,  making  30,000  K.W. 
in  all. 

Taylors  Falls  storage  dam  is  10  miles  long  and  Nevers 
dam  is  said  to  be  17  miles  long,  making  an  unusually  good 
hydro-electric  power  on  the  St.  Croix  river. 

The  almost  entire  cessation  of  flow  in  the  Mississippi  and 
the  great  decrease  of  flow  in  the  St.  Croix  river  during  the 
sudden  cold  weather  of  the  last  week  (November  20,  1911) 
proves  the  imperative  need  of  a  greatly  increased  investment 
in  a  steam  plant  able  to  take  care  of  any  temporary  defi- 
ciency of  the  hydro-electric  plant  and  the  peak  load  when  it 
exceeds  the  whole  power  of  the  St.  Croix  river  at  low  water 


As  a  fact,  this  Minneapolis  General  Electric  Company  has 
found  it  necessary  to  install  a  12,000  K.W.  capacity  duplicate 


84  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

steam  electric  plant,  costing  about  $70  per  K.W.  capacity 
installed,  in  order  to  protect  a  hydro-electric  plant  costing 
about  $150  per  K.W.  capacity  installed. 

SEC.  5.  Depreciation  and  Profits. — Fixing  8  per  cent  on 
the  actual  structural  cost  of  a  new  plant  as  the  rate  of  rea- 
sonable profit  generally  accepted  in  Minneapolis,  and  using 
this  company's  own  figures  for  depreciation,  we  can  fix  the 
reasonable  cash  margin  required  for  both. 

City  plant,  $3,500.00  at  3%  depreciation $105,000.00 

Hydro-plant,  $3,000,000.00,   at  1^%   depre- 
ciation          45,000.00 


Annual  depreciation $150,000.00 

Profit,  $6,500,000.00  at  8% 520,000.00 


Combined  cash  margin  required $670,000.00 

Compared  with 

1910  gross  earnings  Minneapolis  General  Elec- 
tric Co $1,276,041.02 

Operating  expenses  and  taxes 584,440.27 


Net  earnings  (cash  margin) $691,600.75 

SEC.  6.  Sliding  Scale  of  Prices  for  Electricity  Computed. 
The  full  connected  load  operated  2.845  hours  per  day  307 
days: 

Annual  sales  K.W.  hours 29,177,126 

Variable  operating  expense $54,511 .33  or  0.187c.  per  K.W.H. 

Fixed  operating  expense 463,992.82  or  1.590c.  per  K.W.H. 

Profit  and  depreciation 670,000.00       2.296c.  per  K.W.H. 

Total  price $1,188,504.15       4.073c.  per  K.W.H. 

Flat  monthly  price  per  K.W.  capacity  (72.83  hours  per  K.W.) .  .   $2 .97 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  85 

The  full  connected  load  operated  1  hour  per  day  307  days : 

Annual  sales  K.  W.  hours 10,255,580 

Variable  operating  expense $19,160 . 40 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,153,153.22  or  11 .244c.  perK.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (25.6  hours  per  K.W.) ...   $2.88 

The  full  connected  load  operated  2  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 20,511,160 

Variable  operating  expense $38,320 . 80 

Fixed  operating  expense 463,992 .82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,172,313.62  or   5.715c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (51.2  hours  per  K.W.) ...   $2.93 

The  full  connected  load  operated  3  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 30,766,740 

Variable  operating  expense $57,481 .20 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,191,474.02  or   3.873c.  perK.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (76.8  hours) $2.97 

The  full  connected  load  operated  4  hours  per  day  307  days: 

Annual  sales  K.  W.  hours 41,022,320 

Variable  operating  expense $76,641 . 60 

Fixed  operating  expense 463,992.82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,210,634.42  or    2.951c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (102.4  hours) $3 .02 

The  full  connected  load  operated  5  hours  per  day  307  days: 

Annual  sales  K.  W.  hours 51,277,900 

Variable  operating  expense $95,802 . 00 

Fixed  operating  expense 463,992.82 

Profit  and  depreciation 670,000.00 

Total  price $1,229,794 . 82  or   2 . 398c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (128.0  hours) $3.07 


86  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

The  full  connected  load  operated  6  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 61,533,480 

Variable  operating  expense $1 14,962 . 40 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,248,955.22  or    2.03c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (153.6  hours) $3. 12 

The  full  connected  load  operated  7  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 71,789,060 

Variable  operating  expense $134, 122 . 80 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,268,115 . 62  or    1 . 766c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (179.2  hours) $3. 17 

The  full  connected  load  operated  8  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 82,044,640 

Variable  operating  expense $153,283 . 20 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000.00 

Total  price $1,287,276 . 02  or    1 . 569c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (204.8  hours) $3.21 

The  full  connected  load  operated  9  hours  per  day  307  days : 

Annual  sales  K.  W.  hours 92,300,220 

Variable  operating  expense $172,443 . 60 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation ,        670,000.00 

Total  price $1,306,436.42  or    1 .415c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (230.4  hours) $3.26 

The  full  connected  load  operated  10  hours  per  day  307 
days: 

Annual  sales  K.W.  hours 102,555,800 

Variable  operating  expense $191 ,604 . 00 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000.00 

Total  price $1,325,596.82  or    1 .293c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (256  hours  per  K.W.) $3.31 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  87 

The  full  connected  load  operated  12  hours  per  day  307 
days: 

Annual  sales  K.  W.  hours 123,066,960 

Variable  operating  expense $229,924 . 80 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,363,917 . 62  or    1 . 108c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (307.2  hours) $3 .40 

The  full  connected  load  operated  */£  hour  per  day  307 
days: 

Annual  sales  K.  W.  hours 5,127,790 

Variable  operating  expense $9,580 . 20 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000.00 

Total  price $1,143,573.02  or  22.301c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (12.8  hours) $2.85 

The  full  connected  load  operated  12.28  hours  per  day  307 
days: 

Annual  sales  K.W.  hours 125,938,522 

Variable  operating  expense $235,289 . 70 

Fixed  operating  expense 463,992 . 82 

Cash  operating  expense  .  .  .      $699,282 . 52  or   0 . 555c.  per  K.W.H. 
Depreciation 150,000 . 00  or   0 . 119c.  per  K.W.H. 

Complete  operating  cost . . .      $849,282 . 52  or   0 . 674c.  per  K.W.H. 
Profit,  8  per  cent 520,000 . 00  or   0 . 413c.  per  K.W.H. 

Total  price $1,369,282 . 52  or    1 . 087c.  per  K.W.H. 

The  arc  lights  are  said  to  operate  3,770  hours  per  year,  or 
what  is  the  same  as  10.33  hours  for  365  nights,  or  12.28  hours 
for  307  nights. 

Flat  rate,  monthly  price,  per  K.W.  capacity  (314.37  hours) $3.42 


88 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


The  minimum  service  charge  per  K.W.  capacity  of  con- 
nected load: 

No  current  used. 

Fixed  operating  expense $463,992 . 82 

Depreciation 150,000.00 

Profit 520,000.00 


$1,138,992.82 
33.403 

$2.84  per  K.W.  connected 
2.13  per  H.  P.  connected 
or  about  15c.  per  50  watt  16  C.P.  incandescent  lamp  socket. 


Total  K.W.  of  connected  load .  . 
Minimum  monthly  charge 


For  the  sake  of  verifying  the  above  computations  of  rates, 
we  will  make  use  of  the  figures  of  the  connected  load  for  1910 
furnished  by  the  Minneapolis  General  Electric  Company. 

TOTAL  CONNECTED  LOAD  AND  METERS. 


Reported  by  Company,  December  31,  1910. 


10,862,344  K.W.H. 

49,262  K.W.H. 

14,114,833  K.W.H. 

6,380  K.W.H. 

746,907  K.W.H. 

446,400  K.W.H. 


Coml.  inc.  meter.  .  . 
Mun.  inc.  meter .  .  .  . 
Coml.  power  meter. . 
Mun.  power  meter  .  . 
Flat  rate  inc.  meter . 
Ornamental  lighting . 


1 1  ^  nnn  K  w  TT    /  Flat  rate  P°wer>  Total  \ 
113,00)  K.W.H.  |     Included  in  power,    J 

2,838,000  K.W.H.  City  arc 


29,177,126  K.W.H.  Total  Dec.  31 

Average 

Average  of  whole  year  . . 


K.W. 
CON. 

20,544 

us 

15,027 

30 

404 

186 


36,310 
710 

37,020 
32,693 
33,403 


No. 
Meters 
12,694 
74 

1,467 
18 


90% 


14,253 
of   total 


Rearranging  and  classifying,  we  have 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT          89 

TOTAL  CONNECTED  LOAD  AS  CORRECTED. 
Minneapolis  General  Electric  Company. 

December  31,  1910 

Hours 

K.W.  Per          Per         Rate 

Incandescent  Rates  Corrected  Year        Day      K.W.H. 

10,862,344  K.W.H.  Com.  meter.  .      18,490  

49,262  K.W.H.  Mun.  meter.  .  107  

746,907  K.W.H.  Flat  rate 364  

446,400  K.W.H.  Ornamentalst. 

light 167  


12,104,913  19,128     632.83       2.061    5.552c. 

Commercial  Power  Rate  computations  below 

14,114,833  K.W.H.  Power  meter.      13,524     

6,380  K.W.H.  Power  mun...  27     

113,000  K.W.H.  Flat  rate 


14,234,213  13,5511,050.42       3.421    3.419c. 

Rate  computations  below 
City  Street  Arc  Lights— (1,239  Magnetite) 
2,838,000  K.W.H.  City  arc 710     1 .087c. 


33,389 
Variation 14 


Total  as  per  average  given.  .  .   ,  33,403 

We  can  now  compute  the  gross  earnings  on  the  basis  of  the  tabulated 
rates. 

Incandescent  rate  12,104,913  K.W.H.  at  5.552c $672,064.77 

Lamp  renewals  (not  included) . 

Commercial  power,  14,234,213  K.W.H.  at  3.419c 486,667 . 74 

Current  for  arcs,  2,838,000  K.W.H.  at  1.087c "      30,849.06 

$1,189,581.57 

Arc  maintenance  and  operation  not  included. 
Original  figures  used  as  basis  are 1,188,504 . 15 

Variation  one-tenth  of  1  per  cent  due  to  decimals  . .          $1,077.42 


90 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


For  the  full  connected  load  operated  2.061  hours  per  day 
307  days: 

Annual  sales  K.W.  hours 21,136,750 

Variable  operating  expense $39,489 . 58 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,173,482 . 40  or   5 . 552c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  capacity  (52.76  hours) $2 .93 

For  the  full  connected  load  operated  3.421  hours  per  day 
307  days: 

Annual  sales  K.W.  hours 35,084,339 

Variable  operating  expense $65,547 . 73 

Fixed  operating  expense 463,992 . 82 

Profit  and  depreciation 670,000 . 00 

Total  price $1,199,540 . 55  or   3 . 419c.  per  K.W.H. 

Flat  monthly  rate  per  K.W.  hour  capacity  (87.58  hours) $2 . 99 


SEC.  7.     Tabulation  of  Rates  for  Even  Profits 
General  Electric  Company,  1910.     Relation  of 
to  Prices  for  Electricity. 

•,  Minneapolis 
Hours  of  Use 

Flat  Monthly 

Hours  of  use  of 

full 

Price 

Discount  from 

Maximum  Rate 

connected  load 

per 

10  cent 

per  K.W.  of 

Per          Per 

Per 

K.W. 

base  rate  fixed 

Fully  used 

Year      Month 

Day 

hour 

connected  load 

8760       730 

24 

0.574c. 

94.26% 

24  hours  $4.  19 

3684      307.02 

12 

1.108c. 

88.92% 

12  hours    3.40 

3070      256 

10 

1.293c. 

87.07% 

10  hours    3.31 

2763       230 

9 

1.415C. 

85.85% 

9  hours    3  .  26 

2456      205 

8 

1.569c. 

84.31% 

8  hours    3.21 

2149       179 

7 

1.766c. 

82.34% 

7  hours    3  .  17 

1842       154 

6 

2.030c. 

79.70% 

6  hours    3  .  12 

1533       128 

5 

2.398c. 

76.02% 

5  hours    3  .  07 

1228       102 

4 

2.951c. 

70.49% 

4  hours    3.02 

921         77 

3 

3.873c. 

61.27% 

3  hours    2  .  97 

614         51 

2 

5.715c. 

42.85% 

2  hours    2  .  93 

307        25.6 

1 

11.244c. 

Prem.     12.44% 

Ihour     2.88 

153.5       12.8 

H 

22.301c. 

Prem.  123.01% 

Yz  hours    2.85 

0  hours    2  .  84 

(1)            (2) 

(3) 

(4) 

(5) 

(6) 

PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  91 

Note :  The  cost  of  incandescent  lamp  renewals  and  of  arc 
light  operation  and  maintenance  is  omitted  from  the  above 
sliding  scale. 

Three  hundred  and  seven  work  day's  use  per  year  are 
assumed. 

DIRECTIONS  FOR  USE  OF  TABULATION. 

The  metered  K.W.  hours  per  month  are  divided  by  the 
K.W.  capacity  of  the  consumers'  full  connected  load,  as 
estimated  or  measured,  to  obtain  his  monthly  hours  of  use. 
The  rate  per  K.W.  hour  will  be  found  on  the  same  line  or 
can  be  interpolated  for  fractional  part  of  an  hour. 

Minimum  charge  for  no  current,  $2.84  per  K.W. 

SEC.  8.  D.  C.  &  W.  B.  Jackson's  Method  of  Obtaining  the 
Cost  of  Current  for  1,4.30  Street  Arc  Lights.  Minneapolis 
General  Electric  Company's  Report,  page  63. 

We  find  by  dividing  their  figures  by  1,430  street  lights  that 
each  lamp  is  charged  with 

Maximum  demand  in  K.W 0.633 

Annual  K.W.  hours  registered 2377 . 6 

0.633  by  $18  per  K.W.  demand $11.39 

2377 . 6  K.W.  hours  at  0.4c .  .  9.51 


or  2377.6  K.W.  hours  at  .879c $20.90 

Both  the  K.W.  of  demand  and  the  K.W.  hours  generated 
are  assumed  by  them  at  the  main  switchboard  of  the  city 
plant. 

SECTION  9. — The  Contract  Between  Taylors  Falls  Plant  and 
the  City  Plant  of  the  Minneapolis  General  Electric 
Company . 

This  contract  provides  that  the  city  plant  shall  hereafter 
pay  the  Taylors  Falls  hydro-electric  plant  for  power  mea- 


92  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

sured  at  the  switchboard  as  follows:     Taking  the  year  1910 
for  example: 

Maximum  demand,  12,894  at  $18.00 $232,092.00 

K.W.  hours  generated,  40,277,269  at  0.4c..  .          161,109.00 

Total,  40,277,269  at  0.976c $393,201 . 00 

This  would  leave  the  variable  cost  of  generated  current 
fixed  between  0.879c.  and  0.976c.  per  K.W.  hour  to  the  city 
plant  and  yield  gross  earnings  in  the  neighborhood  of  $400,- 
000  to  the  Taylors  Falls  plant  in  the  near  future. 

The  investment  left  in  city  plant  will  be  $3,500,000,  and 
we  have: 

Variable  operating  expense,  city  plant $393,201 . 00 

Fixed  operating  expense,  total .  .  $463,992 . 82 
Less  Taylors  Falls  expense 64,785 . 92 


Fixed  operating  expense,  city.  .  399,206.90 

$792,407.90 

Total  gross  earnings,  1910 $1,276,041.02 

Taylors  Falls  earnings  outside  city 9,988. 13 

City  plant  gross  earnings $1,266,052.89 

Since  the  actual  variable  operating  expenses  in  1910  were 
$54,511.33,  we  find  the  apparent  operating  expenses  will  be 
raised  from  $518,504.15  to  $792,407.90,  the  arc  lights  expense 
and  incandescent  renewals  being  excluded  as  before. 

Since  the  sales  of  electricity  are  reported  to  be  about  75 
per  cent  of  the  quantity  generated,  this  contract  will  ap- 
parently fix  the  lowest  variable  cost  of  current  at  4-3  of 
about  1  cent,  or  1.33c.  per  K.W.  hour  for  the  city  plant 
average  sales,  in  the  future.  Whereas  for  1910  this  variable 
cost  appears  to  really  be  0.187c.  per  K.W.  hour  of  sales  from 
the  books.  It  should  be  noted  that  all  my  own  figures  are 
based  on  sales  only. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  93 

Dividing  the  earnings  of  Taylors  Falls  plant,  $9,866.77, 
by  4.073c.  we  obtain  242,246  K.W.  sales;  which,  subtracted 
from  29,177,126,  leaves  28,934,880  K.W.  hours,  average 
sales  in  the  city. 

The  use  of  the  special  contract  rate,  0.879c.  for  generated 
current,  Jackson's  Report,  page  63,  ($20.85  per  lamp),  is 
equivalent  to  fixing  the  sale  cost  of  current  at  nearly  1.2c. 
per  K.W.  hour.  It  should  be  0.674c.  for  street  arc  lights. 

SEC.  10.  The  Cost  of  Arc  Lights  for  1910  from  the  Com- 
pany 's  Books  and  Records. 

The  cost  of  operating  and  maintaining  the  street  arcs  of 
1910  is  given  as  follows: 

Operating  arc  lamps $34,192. 16 

Maintaining  arc  lamps 6,273 . 12 

$40,465.25 
For  the  year  ending  December  31,  1910: 

Overhead  service,  street  arcs 1,337 

Underground  service,  street  arcs 47 

Overhead  service,  park 8 

Total  number  of  arc  lights 1,392 

Average  per  light  per  year,  for  operation  and  main- 
tenance      $29.07 

This  $29 . 07  is  not  the  cost  per  magnetite  6.6  arc  proposed, 
but  is  very  nearly  the  cost  of  the  old  9.6  arc,  trimmed  every 
day  instead  of  once  a  week  or  ten  days,  and  therefore  re- 
quiring very  much  more  labor  for  operation;  so  we  are  very 
liberal  in  assuming  it  to  cover  all  operation  and  maintenance 
of  the  new  magnetite  6.6  arcs  to  be  substituted  for  the  .old 
arc  lights. 

Barring  incandescent  and  arc  lights  special  expenses,  but 
including  expenses,  depreciations  of  the  whole  plant,  arc 
light  circuits  and  everything  else  averaged,  we  find  the  com- 
plete operating  cost  of  current  to  be  0.674c.  per  K.W.  hour. 


94  PRACTICAL    RATE    MAKING   AND    APPRAISEMENT 

By  actual  measurement  in  sub-stations  on  Main  street 
and  Garfield  avenue,  each  of  these  magnetite  arcs  rated  at 
510  watts  takes  608  watts,  and  further  is  said  to  burn  3,770 
hours  per  year,  consuming  2,292  K.W.  hours. 
2,292  K.W.  hours  at  0.674c $15.45 

If  now  we  accept  the  very  liberal  appraisement  of  the 
Minneapolis  General  Electric  Company,  of  $264.50  invest- 
ment per  arc  in  a  proposed  installation  of  1,430  street  lights 
and  accord  a  profit  of  8  per  cent  we  have 
$264.50  (see  Jackson's  Report,  page  45)  at  8% $21 . 16 

Recapitulating  for  one  arc  light : 

Cost  of  operating  and  maintaining  old  arcs $29 . 07 

Cost  of  2,292  K.W.  hours,  depreciation  included.  .       15.45 
Profit  per  arc,  $264.50  at  8% ' 21 . 16 


Total  fair  and  reasonable  price,  2,292  K.W. 

hours  at  2.865c $65.68 

Of  course,  the  objection  will  at  once  be  made  to  this  that 
$29.07  is  based  on  another  type  of  lamp,  and  that  $35.50 
(see  Jackson's  Report,  page  61)  is  the  proper  amount. 
However,  this  company's  books  for  1910  contradict  this, 
and  presumably  are  more  practically  correct  than  propor- 
tions and  assumptions  (undoubtedly  made  in  good  faith) 
which  may  or  may  not  prove  practically  true. 

The  $15.45  for  current  differs  from  the  $20.85  claimed  by 
the  company  (see  Jackson's  Report,  page  63),  for  the  reason 
that  it  is  carefully  deduced  from  the  actual  facts  of  the 
operations  of  this  company  for  1910  as  recorded  in  its  books, 
with  an  extra  allowance  for  average  depreciation  cost  in- 
cluded, based  on  the  average  depreciation  of  the  whole 
plant. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  95 

By  the  method  adopted  in  Section  6,  the  complete  cost  and 
the  complete  price  of  the  current  is  computed  for  the  cur- 
rent in  K.W.  hours  as  a  whole. 

The  cost  $20.85  claimed  is  the  result  of  accepting  the 
terms  of  a  contract  made  with  the  Taylors  Falls  plant,  which 
yields  to  it  a  profit  on  all  current  delivered  to  the  city  plant, 
which  in  turn  must  use  this  profitable  price  as  the  cost  basis 
of  rates  to  Minneapolis  consumers,  who  thus  pay  two  profits. 

As  to  the  profit  8  per  cent  on  $264.50,  or  $21.16  for  the 
average  investment  per  arc  light,  there  is  no  present  ne- 
cessity to  investigate  it,  as  the  company  has  fixed  upon 
$264.50  investment  per  arc,  and  it  would  be  as  impossible 
as  it  would  be  insincere  to  concede  or  to  claim  exact  ac- 
curacy to  be  attainable  in  this  case  by  any  one. 

On  page  57  of  Jackson's  Report,  if  we  divided 

operating  cost,  insurance,  taxes,  etc $31,439.00 

By  1,430  arcs,  we  shall  have,  for  each  arc.  ...  21.99 

On  page  61  of  Jackson's  Report,  if  we  divide 

total  depreciation  of  arc  system 18,679 . 00 

By  1,430  arcs,  we  have,  for  each  arc 13 . 06 

Total  operating  cost  and  depreciation  per  arc 

(Jackson's) 35.05 

This  the  Minneapolis  General  Elec- 
tric Company's  book  gives  as  oper- 
ation and  maintenance $29 . 07 

And  general  depreciation,  2,292  K.W. 

hours  at  0. 12c.  .  2.75  31.82 


Excess  of  the  Jackson's  estimate  over  book 

records  1910 $3.23 

As  above  explained,  this  residual  depreciation  (after  com- 
plete repairs,  reckoned  at  3  per  cent  on  the  whole  plant,  is 
taken  care  of  in  computing  the  cost  of  current  ($15.45), 


96  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

in  which  it  ($2.75)  is  included,  as  an  average  spread  over  the 
total  sales  (29,177,126  K.W.  hours). 

SEC.  11.  Regarding  Street  Arc  Lights  as  a  By-Product 
Furnished  Without  Profit. — From  the  foregoing  figures,  if 
we  omit  profit,  we  shall  have : 

Cost  of  operating  and  maintaining  arcs,  special 

accounts $29 . 07 

Cost  of  2,292  K.W.  hours,  ($2.75,  depreciation  in- 
cluded)   15.45 


Total  cost  of  one  6.6  ampere  magnetite $44 . 52 

Duluth  is  at  present  offering  to  furnish  arc  lighting  at 
$45  per.  6.6  magnetite  arc  per  year,  and  confirms  the  above 
figures  by  stating  that  it  offers  to  furnish  street  lighting  at 
cost. 

SEC.  12.  Regarding  Street  Arc  Lights  as  Furnished  on 
the  Basis  of  the  Average  Profit  Included  in  the  Price  of  the 
Current  for  All  Consumers. 

Cost  of  operating  and  maintaining  arcs,   special 

accounts $29 . 07 

2,292  K.W.  hours  at  1.087c .  .  24 . 91 


Price  per  arc  light $53 . 98 

Profit  per  year,  per  arc 9 . 46 

The  City  of  St.  Louis  purchased  its  6.6  magnetite  arcs 
for  $49.00  per  year  for  4,000  from  a  steam-driven  station, 
and  the  company  was  presumably  arranging  (on  the  average) 
to  take  a  little  less  profit  on  arc  light  investment,  and  recoup 
itself  by  a  very  small  excess  profit  per  K.W.  hour  from  its 
commercial  patrons,  who  required  a  less  investment  per 
K.W.  capacity. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  97 

SEC.  13.  The  Supplemental  Steam  Plant. — The  Minne- 
apolis General  Electric  Company  found  it  practical  and 
necessary  in  1910  to  have  about  6,000  K.W.  capacity  steam 
plant  in  addition  to  its  15,000  K.W.  capacity  hydro-electric 
plant  at  Taylors  Falls. 

In  my  estimate  of  $3,500,000  is  included  this  6,000  K.W. 
capacity  steam  plant,  which  was  burned  in  the  fire  of 
January  6,  1911.  The  depreciation  and  the  profit  on  this 
steam  plant  are  included  in  the  depreciation  and  profit 
figured  upon  $3,500,000  total  investment. 

The  present  Riverside  12,000  K.W.  capacity  steam  plant 
appears  to  have  been  built  to  take  care  of  the  burned  steam 
plant  capacity,  as  well  as  anticipate  future  needs,  and  need 
not  be  considered  in  this  case,  as  we  are  considering  merely 
the  facts  for  the  year  1910. 

As  already  stated,  at  the  Fifth  street  sub-station  there  is 
now,  and  I  believe  always  has  been,  one  400  K.W.  generator 
held  in  reserve  for  emergencies  and  operated  by  a  600  H.P. 
steam  engine. 

This,  too,  is  included  in  the  estimate  of  $3,500,000  total 
present  value  of  residual  machinery  and  plant  in  the  year 
1910. 

It  would  naturally  be  assumed  that  if  the  costs  of  1910 
included  the  6,000  K.W.  steam  plant  that  these  same  costs 
will  sufficiently  cover,  because  of  the  greatly  increasing 
load,  any  costs  arising  from  the  new  12,000  K.W.  steam 
plant. 

As  a  matter  of  future  interest,  the  new  Riverside  station 
has  cost  this  company,  complete  and  ready  to  run,  in  the 
neighborhood  of  $72  a  K.W. 

If  we  take  each  arc  lamp  as  requiring  about  0.6  of  a  K.W., 


98  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

this  would  make  about  $43  investment  for  each  arc  light's 
insurance. 

If  to  this  we  wish  to  add  the  proportional  cost  of  the  cables 
and  conduits  between  the  Riverside  station  and  the  Main 
street  station,  enough  investment  will  be  added  to  raise  the 
total  investment  for  arc  lamp  insurance  to  about  $52,  as 
stated. 

.  If  we  reckon  the  profit  8  per  cent  and  the  residual  deprecia- 
tion 3  per  cent,  we  have  for  the  purpose  of  insurance  of 
continuity  of  service  of  the  arc  lights  about  $5.70;  this  sum 
covering  the  profit  and  the  depreciation.  Or,  a  smaller 
sum  than  this  can  be  reckoned,  if  less  than  11  per  cent  is 
fixed  upon  by  the  committee. 

Personally,  it  is  my  opinion  that  the  price  $65.68  derived 
from  the  conditions  of  the  year  1910  is  sufficient  without  any 
addition  for  future  possibilities. 

SEC.  14.  Extras  for  Incandescent  Lights  and  Arc  Lights. — 
It  is  not  very  clear  to  the  writer  as  to  the  extent  to  which 
the  furnishing  of  free  incandescent  lights  is  carried. 

On  page  13  will  be  found  in  the  operating  expenses  a 
charge  to  the  renewal  of  incandescent  lamps  of  $25,470.84. 
In  computing  the  cost  of  current  as  there  explained,  this  sum 
has  been  omitted  from  the  operating  expenses  temporarily, 
and  therefore  wherever  incandescent  lights  are  furnished  free 
to  users,  an  additional  charge  per  K.W.  hour  should  be  made 
to  the  rate  obtained,  to  cover  the  cost  of  free  incandescent 
lights. 

The  ordinary  16  C.P.  carbon  filament  50-watt  lamp  costs 
at  the  factory  about  12j^c.  and  by  the  time  it  reaches  the 
consumer  may  be  presumed  to  have  cost  the  company 
about  15c. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  99 

The  life  of  this  lamp  is  usually  taken  at  1 ,000  hours,  so  that  by 
the  time  it  is  burned  out  it  will  have  consumed  50  K.W.  hours. 

If  now  we  divide  15c.  by  50,  we  obtain  0.3  (three-tenths) 
of  a  cent  as  the  additional  cost  of  incandescent  lighting  to 
be  added  to  the  rate  found  in  Diagram  1,  if  lamps  are  fur- 
nished free. 

Referring  to  the  arc  lights  for  the  year  1910,  from  page  13 
it  will  be  seen  that  operating  arc  lamps,  $34,192.16,  and  main- 
tenance of  arc  lamps,  $6,273.12,  total  $40,465.25,  have  been 
omitted  from  the  computations  for  the  cost  of  current,  and 
therefore  this  sum  for  the  1,392  arcs  reported  for  1910 
which  were  mostly  of  the  old-fashioned  9.6  ampere  open  arc 
variety,  must  be  added  to  the  current  cost  (or  cost  for  power) 
of  the  arc  lights. 

This  gives  us,  as  heretofore  stated,  a  cost  per  individual 
arc  light  for  1910  from  the  books  of  the  company  for  arc 
lights  requiring  a  great  deal  more  labor  in  trimming  than  the 
proposed  magnetite  arc  lights,  of  $29.07. 

This  $29.07  is  a  very  much  exaggerated  estimate  of  the 
probable  future  cost  of  magnetite  arc  lights. 

Taking  some  of  the  details,  for  instance,  from  the  published 
data  of  the  General  Electric  Company,  we  have  for  trimming 
one  lamp  one  year  labor  as  follows: 

For  the  old  9.6  ampere  open  arc $6 . 00 

For  the  new  6.6  ampere  magnetite  arc 1 .00 

And  for  the  carbons  for  the  old  9.6  open  arc  per 

year.... $5.50 

From  the  report  of  Messrs.  Jackson,  page  46,  we  have  for 
the  proposed  6.6  magnetite  arc: 
Cost  for  lower  electrodes .  .  $2 . 04 


Forward,      $2.04 


100  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Brought  Forward,       $2 . 04 

Cost  for  upper  electrodes .50 

Cost  for  changing  upper  electrodes .  .  .  . .15 

Total $2.69 

An  extra  expense  in  the  case  of  magnetite  arc  lights  is  the 
cost  of  rectifier  tubes  per  year,  which  is  reckoned,  Jackson's 
Report,  page  46,  at  $3.75.  Adding  these  items  together 
we  have  for  the  old  9.6  open  arc  carbon  $11.50,  as  against 
$7.44  for  the  6.6  magnetite  arc  lights  per  year. 

In  other  details  of  labor  for  street  arc  lights  the  cost  to  the 
station  will  not  greatly  differ,  and  we  see  that  in  taking 
$29.07  from  the  books  of  this  company  as  covering  operation 
and  maintenance  of  arc  lamps  we  have  left  an  abundance 
of  margin  in  favor  of  the  company. 

The  investment  per  K.W.  capacity  made  by  the  company 
for  the  purpose  of  supplying  commercial  consumers  with 
power  and  light  is  very  much  less  than  the  investment  per 
K.W.  capacity  made  by  the  company  for  the  purpose  of 
supplying  the  city  street  lights. 

It  will  easily  be  seen  that  this  company's  investment 
ceases  at  the  meter  in  the  case  of  commercial  consumers, 
who  supply  their  own  interior  wiring  for  lighting  or  power 
purposes,  but  the  case  is  different  in  the  matter  of  street 
lighting,  for  the  company  has  not  only  to  lay  its  street 
cable  and  services,  as  in  the  case  of  commercial  consumers, 
but  also  has  to  erect  poles,  furnish  mast-arms,  insulating 
heads,  cut-outs  and  lamps,  and  also  after  these  are  erected 
it  is  obliged  to  keep  them  in  a  state  of  perfect  repair,  and 
also  to  furnish  all  the  labor  and  material  required  in  the  daily 
operation  of  these  lamps  for  365  nights  of  the  year. 

The  officers  of  the  Minneapolis  General  Electric  Company 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  101 

and  Mr.  Wm.  B.  Jackson  were  untiring  in  the  consideration 
with  which  they  assisted  me  to  all  the  facts  directly  re- 
quested, and  also  in  going  over  the  very  careful,  and  ex- 
haustive report  of  Messrs.  D.  C.  and  Wm.  B.  Jackson. 

Referring  to  this  report,  I  would  say  that  it  has  had  the 
most  careful  consideration  at  my  hands,  and  that  I  find  it 
impossible  to  agree  with  some  of  the  methods  of  apportion- 
ment used  in  following  the  apparatus  required  for  street  arc 
lighting  from  the  source  of  power  to  the  lamp;  but  I  am 
willing  to  provisionally  accept  as  not  far  from  correct  the 
following  figures  as  given  on  page  34:  "The  present  value 
of  the  distribution  system  shown  by  details  in  Table  7-A, 
in  which  is  used  the  greatest  value  of  the  investment.  In 
our  estimates  of  the  cost  of  giving  arc  light  service,  and  we 
have  not  made  any  addition  for  an  allowance  for  the  cost  of 
selling  securities. 

"Our  figures  for  cost  of  giving  arc  light  service,  are  the  re- 
fore  low  in  this  particular,  as  well  as  in  other  particulars," 
$363,650. 

And  on  page  44 :  "  Investment  in  13,000  volt  transmission 
lines  from  sub-station  'A'  to  the  Main  street  distribution 
station.  The  aggregate  of  investment  in  the  13,000  volt 
transmission  lines  which  reverts  to  the  municipal  £rc  light- 
ing service  is  $14,610,"  total  $378,260. 

If  we  divide  this  total  by  1,430  arc  lights,  for  which  the 

estimate  is  made,  we  obtain  $264.50  investment  per  arc  light. 

This  section  has  been  added  for  the  purpose  of  making 

the  way  in  which  my  own  extras  have  been  added  to  the  cost 

of  current  entirely  clear,  item  by  item,  for  arc  lighting. 

SEC.  15.  Practical  Difficulties. — The  practical  difficulties 
of  comprehension  arising  in  the  attempt  to  lucidly  and 


102  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

clearly  grasp  the  problem  of  a  system  of  charges  wi  ich 
protects  the  company  in  an  even  profit  and  at  the  same  time 
places  all  the  consumers  on  an  equal  footing  in  a  judicially 
fair  way,  seem  almost  insuperable  to  the  minds  of  even  those 
actively  engaged  in  the  management  of  electric  stations. 

For  this  reason,  I  will  endeavor  to  make  the  facts  of  the 
operation  of  an  electric  station  clear  by  means  of  comparison 
with  an  auditorium  filled  with  individual  chairs. 

These  chairs  being  supposed  to  be  heated  by  means  of  an 
electric  heater  set  in  operation  when  occupied. 

Each  K.W.  of  capacity  of  an  electric  station  must  be 
represented  by  one  chair  of  capacity  of  the  auditorium. 

In  the  case  of  the  Minneapolis  General  Electric  Company, 
its  1910  capacity  was  about  21,000  K.W.,  and  for  this  reason 
the  auditorium  will  be  assumed  to  have  a  capacity  of 
21,000  chairs. 

The  connected  load  of  1910  was  33,403  K.W.,  and  for  this 
reason  it  can  be  assumed  that  33,403  chair  tickets  have  been 
distributed  to  applicants  for  seat  space  in  the  auditorium. 

During  the  year  1910  it  was  found  by  actual  observation 
that  on  the  21st  day  of  December  12,892  chairs  were  occu- 
pied between  half-past  4  and  7  o  'clock,  and  that  this  was  the 
largest  number  of  chairs  occupied  at  any  one  time  by  the 
33,403  ticket-holders. 

Taking  the  ticket-holders  and  classifying  them,  we  find 
first  what  might  be  called  the  dwelling-house  class,  who 
occupied  their  chairs  comparatively  very  little  and  used 
most  of  them  after  7  o'clock. 

Occasionally  this  dwelling-house  class  would  get  together 
for  an  entertainment  and  utilize,  in  certain  individual 
instances,  all  of  the  chairs  for  which  they  had  tickets. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  103 

Another  class  of  chair  ticket-holders  may  be  called  the 
theater  class.  This  class  occupied  the  chairs  to  which  it  had 
a  right  every  evening  in  the  week  for  a  large  portion  of  the 
year  from  the  hour  of  8  until  11,  and  during  the  daytime 
would  occupy  its  chairs  from  2  until  5  in  giving  matinees, 
ranging  from  two  to  six  times  a  week. 

Another  class  of  chair  ticket-holders  is  the  restaurant  and 
saloon  class.  This  class  occupied  its  chairs  with  regularity 
from  4  to  5  o'clock  until  midnight. 

The  churches  form  a  class  which  occupied  their  chairs 
on  Sundays  and  in  the  evenings  from  8  o'clock  until  10, 
but  do  not  form  large  or  frequent  users. 

The  motive  power  users  form  a  class,  which,  in  the  case  of 
factories  and  machine  shops,  occupied  their  chairs,  or  a 
portion  of  them,  from  7  o'clock  in  the  morning  until  6  o'clock 
at  night. 

The  great  office  buildings  form  a  class  which  occupied 
their  chairs  for  about  one  hour  during  winter  afternoons 
but  rarely  occupied  them  at  all  during  the  summer  months. 

The  street  lights  form  a  class,  which,  going  on  at  about 
5  o'clock  in  winter  and  later  in  summer,  occupied  its  chairs 
in  this  auditorium  until  the  following  dawn.  It  is  par- 
ticularly with  this  class  that  I  am  dealing,  and  I  desire  to 
call  your  attention  to  the  fact  that  the  street  lights  from 
midnight  on  until  daylight  were  almost  the  only  patrons  of 
chairs  in  this  great  auditorium. 

There  is  also  another  peculiarity  of  the  street  lights.  They 
were  unfailing  in  their  occupancy,  going  on  in  a  certain 
quantity  every  night  and  all  night  for  the  whole  year. 

At  the  entrance  to  this  auditorium,  the  ticket-holders,  as 
to  the  number  of  chairs  and  the  hours  of  occupancy,  are 


104  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

registered  as  they  come  in  or  go  out,  and  this  registry  of 
chair  hours  is  fitly  represented  by  the  electric  meter  making  a 
record  in  K.W.  hours. 

The  question  now  before  us  is  how  to  divide  up  the  oper- 
ating expenses,  the  depreciation  and  the  profit  amongst 
the  patrons  of  this  auditorium. 

There  are  certain  classes  of  ticket-holders  for  chairs  which 
must  have  special  consideration  at  the  hands  of  the  business 
manager. 

You  will  recall  that  out  of  the  21,000  chairs  installed, 
only  12,893  were  occupied  at  one  time  during  one  day  in  the 
year. 

If  a  certain  class  of  ticket-holders  would  agree  never  to 
occupy  their  chairs  between  the  hours  of  4  and  7  p.m.,  it 
is  obvious  that  the  business  manager  could  make  a  large 
concession  to  them,  because  he  has  found  out  by  practical 
experience  that  there  will  always  be  plenty  of  room  in  the 
auditorium  and  no  trouble  about  accommodating  them. 

Another  class  is  the  individual  purchaser  of  a  very  large 
number  of  chair  tickets,  who  might  find  it  cheaper  to  build 
an  auditorium  of  his  own,  and  probably  will  do  so  if  he  can- 
not be  shown  that  it  will  cost  him  less  to  join  in  the  occu- 
pancy of  the  larger  auditorium  with  other  ticket-holders. 

Speaking  of  these  classes,  the  former  might  be  called  by 
an  electric  station  manager  restricted  users  of  electricity, 
who  do  not  go  on  the  peak  load,  and  the  latter  might  be 
called  wholesale  consumers  of  electricity  who  are  almost 
large  enough  in  their  demands  to  compete  with  the  station 
itself. 

Having  thus  set  apart  these  two  classes,  the  question 
comes  up,  what  shall  we  use  to  divide  up  the  cash  operating 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  105 

cost,  the  depreciation  and  the  profit  required  to  keep  our 
large  auditorium  going  with  the  rest? 

In  a  commercial  matter  of  this  sort  it  is  seen  at  once 
that  each  chair  ticket  represents  the  right  to  enter  the  audi- 
torium and  use  a  chair  at  will. 

We  have  called  these  chair  tickets  the  connected  load, 
and  as  almost  all  the  operating  costs  of  an  electric  station 
are  in  the  nature  of  fixed  expenses,  which  go  on  regardless  of 
whether  the  auditorium  is  full  or  empty,  it  would  seem  only 
just  that  each  ticket  should  bear  its  share  of  the  annual 
expenses  and  profit  of  the  auditorium.  That  is  to  say,  that 
if  there  are  33,403  tickets,  we  should  divide  the  total  expenses 
found  to  have  actually  been  for  the  year  1910,  $1,188,504.15, 
by  33,403,  in  order  to  place  the  burden  equally  upon  all 
ticket-holders  which  gives  us  an  annual  rate  of  $35.58  per 
chair.  Or,  if  we  divide  this  by  12  months,  a  monthly  rate 
of  $2.97  per  chair.  Or,  as  will  be  seen,  $2.97  per  K.W. 
capacity  of  the  connected  load. 

Referring  to  Minimum  Service  Charge,  No  Current  Used, 
if  we  divide  the  total  of  the  fixed  operating  expenses,  de- 
preciation and  profit,  $1,138,992.82,  by  33,403,  we  obtain 
a  minimum  monthly  charge  per  chair  of  $2.84. 

If  the  electric  current  heating  our  imaginary  auditorium 
were  derived  from  a  waterfall,  always  amply  sufficient  and 
never-failing,  there  would  be  no  variable  expense,  as  there 
is  in  the  case  where  coal  is  burned,  and  consequently  it 
would  be  judicially  fair  to  charge  each  ticket-holder  $2.84 
per  month  and  permit  him  to  occupy  his  chair  and  operate 
his  electric  apparatus  for  as  many  hours  per  day  as  suited 
his  convenience  or  needs,  regardless  of  the  amount  of  elec- 
tricity used. 


106  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

This  situation  in  the  auditorium  is  equivalent  to  fixing 
a  flat  rate  for  electricity  on  the  basis  of  the  K.W.  of  connected 
load  without  in  any  way  limiting  the  length  of  use  of  elec- 
tricity per  day,  per  month  or  per  year. 

However,  in  order  to  protect  themselves  from  careless 
waste  of  current,  electric  companies  have  found  it  necessary 
to  keep  a  record  of  the  number  of  hours  of  use  of  their  K.W., 
and  similarly  in  the  case  of  the  auditorium,  if  no  record  were 
kept  of  the  hours  of  use  of  the  chairs,  in  all  probability  it 
would  soon  be  over-crowded  and  the  33,403  ticket-holders 
would  endeavor  to  occupy  21,000  chairs.  However,  by 
charging  in  the  case  of  the  auditorium  for  occupancy  on  the 
basis  of  the  chair  hour,  and  in  the  case  of  an  electric  station 
on  the  basis  of  K.W.  hour,  consumers  are  prevented  from 
either  occupying  seats  or  demanding  K.W.  for  long  hours 
when  they  do  not  really  need  them. 

In  fact,  the  only  reason  for  not  adopting  a  flat  rate  per 
K.W.  per  month,  in  the  case  of  ample  water  power,  is  to  pre- 
vent wasteful  overcrowding  of  electric  machinery  or  of  our 
imaginary  auditorium. 

This  is  not  the  case  where  fuel  is  used  to  generate  elec- 
tricity. Then  the  cost  of  the  fuel  increases  with  the  amount 
of  electric  power  taken,  and  in  our  imaginary  auditorium 
each  chair  hour  would  add  to  the  coal  bill;  and  if,  as  in  the 
present  case,  a  waterfall  is  found  at  times  to  become  in- 
sufficient and  steam  power  is  required,  we  must  take  cog- 
nizance of  the  fuel  bill  and  some  smaller  appurtenant  bills 
as  a  variable  charge,  and  when  this  happens  we  cannot  reach 
a  flat  rate  or  a  uniform  meter  rate  applied  to  all  consumers, 
for  the  following  reasons: 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  107 

Like  the  auditorium,  an  electric  station  is  paid  mostly 
for  its  service,  and  not  for  what  it  sells  as  a  commodity 
(electricity,  heat). 

The  fixed  expenses  consist  entirely  of  payroll,  of  taxes,  of 
repairs,  of  depreciation  and  of  profit  on  the  investment, 
which  form  an  even  sum  each  day  and  each  year,  depending 
almost  altogether  on  the  passage  of  time  and  independent  of 
the  electricity  (heat)  furnished  in  small  quantities. 

In  1910,  we  find  from  the  records  of  the  company  that 
the  variable  operating  expenses  are  $54,511.33  on  the  as- 
sumption that  the  33,403  ticket-holders  occupied  their  chairs 
on  an  average  2.845  of  an  hour  per  day,  and  in  so  doing 
registered  an  aggregate  of  29,177,126  chair  hours. 

If  now  we  wish  to  find  a  fair  price  to  be  charged  per  chair 
hour,  we  divide  the  total  of  the  variable  and  fixed  operating 
expenses  and  profit  and  depreciation,  $1,188,504.15,  by 
29,177,126  chair  hours  and  obtain  an  average  price  of  4.07c. 
per  chair  hour,  yielding  an  8  per  cent  profit  upon  the  in- 
vestment and  covering  all  other  expenses. 

If  now  the  question  arises,  what  should  be  the  price  per 
chair  hour  if  the  33,403  ticket-holders  had  averaged  an 
occupancy  of  only  one  hour  per  day,  we  divide  the  actual 
variable  operating  expenses,  $54,511.33,  by  2.845  hours  and 
obtain  for  the  variable  operating  expense  for  one  hour  per 
day  $19,160.40,  to  which  we  add  the  fixed  operating  expense 
and  profit  and  depreciation,  obtaining  $1,153,153.22. 

In  order  to  obtain  the  number  of  chair  hours  sold,  we  also 
divide  29,177,126  chair  hours  by  2.845  hours,  which  gives 
us  10,255,580  chair  hours  as  the  amount  sold;  and  if  we  divide 
this  into  the  $1,153,153.22  previously  found,  we  obtain 
11.24c.  as  the  fair  price  to  be  charged  per  chair  hour  in 


108  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

order  that  the  auditorium  company  shall  cover  its  fixed 
and  variable  expenses,  profit  and  depreciation,  and  the  bur- 
den of  payment  be  distributed  with  judicial  fairness. 

It  is  hardly  necessary  to  add  further  computations,  for  the 
price  for  any  number  of  hours  per  day  can  be  obtained  in  a 
similar  manner,  for  an  electric  station. 

In  order  to  avoid  any  fallacy  of  an  incorrect  numerical 
theory,  there  has  been  brought  together  and  classified 
the  K.W.  hours  for  incandescent  rates  for  commercial  power 
and  for  city  street  arc  light  as  they  actually  existed  in  1910, 
and  the  proper  price  per  K.W.  hour  for  each  class  has  been 
deduced.  We  have  the  result,  therefore,  of  reversing  the 
operation  of  this  method,  which  is  shown  to  check  out 
within  a  variation  of  1-10  of  1  per  cent. 

It  is  interesting  to  note  that  the  average  price  for  in- 
candescent light  current  proves  to  be  5.55c.,  which  would 
rise  to  5.85c.  if  carbon  filament  lamps  are  furnished  free. 

Commercial  power  in  all  its  various  forms  averaged  a  fair 
price  of  3.42c.  per  K.W.  hour,  and  there  should  be  no  addi- 
tion to  this  price,  since  the  current  is  simply  delivered  to 
the  motor  furnished  by  the  consumer. 

However,  these  figures  are  of  only  passing  interest  as 
having  been  necessary  in  order  to  find  the  general  price  and 
cost  of  electricity  to  be  used  in  street  arc  lighting. 

Both  these  departments  of  incandescent  rates  and  com- 
mercial power  should  have  careful  segregation  and  their 
details  studied  before  fixing  the  many  rates  required  by  their 
many  phases. 

In  the  matter  of  street  arc  lighting,  however,  we  find  that 
the  current  alone,  practically  used  about  lOVs  hours  a  night, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  109 

reaches  a  fair  price  of  1.09c.,  and  is  produced  at  a  complete 
operating  cost  of  about  0.67  of  a  cent. 

You  will  recall  (Section  10,  and  following),  I  have  used 
this  cost,  together  with  the  maintenance  and  special  opera- 
tion and  the  profit,  to  obtain  the  fair  price  for  a  street 
arc  light,  also  using  the  investment  per  arc  light,  $264.50, 
obtained  from  the  elaborate  appraisement  of  the  Messrs. 
Jackson,  and  the  maintenance  and  operation,  $29.07, 
obtained  from  the  company's  books  for  1910,  and  the  cost  of 
current  inclusive  of  residual  depreciation  of  3  per  cent  spread 
over  the  whole  works,  amounting  to  $15.45. 

In  order  that  the  results  of  my  computations  shall  be  in  a 
concise  form,  I  have  prepared  Diagram  1,  which  represents 
the  actual  practical  facts  and  the  various  rates  resulting  from 
them  in  the  case  of  the  Minneapolis  General  Electric  Com- 
pany for  the  year  1910.  It  is  worthy  of  note  in  connection 
with  this  diagram  that  the  net  earnings  of  this  company  for 
the  year  1910  were  about  $691,000,  and  the  basis  of  this 
diagram  allows  for  a  net  earning  of  $670,000,  a  difference  of 
a  little  over  $20,000. 

I  may  be  pardoned  for  saying  that  in  reaching  this  latter 
figure  of  $670,000,  I  made  no  forecast  and  no  attempt  to 
alter  the  valuation  based  on  my  own  judgment,  and  that 
on  the  whole  this  near  coincidence  to  the  rate  of  profit  fixed 
by  the  city's  committee  would  go  to  show  that  in  the 
aggregate  the  profits  of  this  company  have  not  been  unduly 
great,  however  just  may  be  the  criticisms  of  their  rates  and 
methods  of  making  them  in  individual  instances. 

My  excuse  for  making  this  lengthy  comparison  between  an 
auditorium  and  its  seating  space  and  an  electric  light  and 
power  company  and  its  capacity  is  because  in  my  experience 


110  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

I  have  met  with  almost  innumerable  methods  of  attempting 
to  solve  the  problem  of  electric  rates,  which,  in  part  at  least, 
were  both  superficial  and  incorrect. 

I  trust  that  I  have  your  full  concurrence  in  this  method, 
which  I  conceive  to  be  the  one  right  method  of  attacking  this 
problem,  and  that  I  have  placed  its  fundamentals  lucidly 
before  you  and  proved  to  you  that  it  is  rational,  practical, 
judicially  fair,  giving  an  even  profit  to  the  company  from 
all  connected  consumers,  and  placing  all  consumers  on  an 
equal  footing  in  their  contributions  to  the  support  of  the 
company  which  serves  them. 

It  seems  almost  impossible  to  convince  even  station  man- 
agers that  an  electric  light  and  power  company  is  a  servant, 
giving  service  and  going  to  a  great  expense  for  this  service, 
while  the  commodity  (electricity)  which  is  sold,  is  relatively 
very,  very  small  indeed  in  its  cost  for  the  one  element  which 
is  variable  in  steam  stations,  that  is  fuel,  and  which,  theoreti- 
cally at  least,  has  no  cost  at  all  in  water-power  stations. 

SEC.  16.  Recapitulation. — It  is  as  impossible  as  it  would 
be  insincere  for  anyone  to  claim  in  so  complex  a  problem  as 
this  of  the  price  of  arc  lights  to  have  reached  a  scientifically 
accurate  conclusion. 

I  believe  my  figures  to  have  been  judicially  fair,  except 
that  in  cases  of  doubt  I  have  always  favored  the  company, 
feeling  that  no  institution  is  of  any  ultimate  value  to  a 
community  unless  it  makes  a  fair  profit. 

For  this  reason,  instead  of  using  the  generated  K.W.  hours 
40,277,269,  I  have  used  the  K.W.  hours  sold,  29,177,126, 
to  divide  the  lump  sum,  cost  and  profit,  of  operations  for  the 
year  1910  ($1,188,504.15).  In  doing  this,  I  have  placed 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


111 


CO.  /9/O. 
//?e 
/f//0*y&//    /rot//-  so/J  #/?</  corg/v 


112  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

the  price  of  a  K.W.  hour  33  1-3  per  cent  higher  than  if  I  had 
used  the  generated  power. 

Instead  of  using  the  commercial  rating  of  the  6.6  ampere 
magnetite  lamps  as  given  at  510  watts,  I  have  taken  the 
measurement  made  by  the  company  at  the  sub-station  and 
rated  these  lamps  at  608  watts  each,  which  makes  the  rating 
used  by  me  about  20  per  cent  higher  than  the  trade  rating  at 
which  they  are  sold. 

In  fixing  the  maintenance  and  cost  of  one  arc  light  per 
year,  taken  from  the  books  of  the  company,  at  $29.07,  I  have 
taken  the  cost  and  maintenance  and  the  operation  of  the  old- 
fashioned  lamp  requiring  trimming  and  new  carbons  every 
day.  It  is  stated  by  the  Schenectady  General  Electric 
Company  to  be  much  in  excess  of  the  operating  cost  and 
maintenance  of  the  new  magnetite  arc  lights. 

In  computing  the  cost  of  power  I  have  included  in  it  not 
only  all  repairs,  and  the  fuel,  but  also  a  residual  deprecia- 
tion upon  the  whole  works  of  3  per  cent  as  an  extra,  which 
is  added  on  the  supposition  that  all  that  can  be  has  been 
done  in  the  way  of  maintenance  and  repairs  to  the  whole 
works. 

I  beg  leave  to  again  call  your  attention  to  the  great  liber- 
ality of  8  per  cent  profit,  allowed  on  the  investment  per 
magnetite  arc  light  proposed. 

In  figuring  this  investment  of  $264.50,  I  have  accepted  the 
figures  reached  by  the  representatives  of  the  Minneapolis 
General  Electric  Company  in  a  most  exhaustive  and  elabor- 
ate examination  of  every  part  of  the  arc  light  system,  and 
have  only  reduced  this  figure  from  $284.00  because  of  an 
obvious  slip  in  final  computation  of  the  present  value  of 
each  arc  light. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  113 

I  know  it  is  in  consonance  with  the  wishes  of  the  com- 
mittee to  have  me  do  as  I  have  done;  I  have  always  favored 
the  company  in  doubtful  cases. 

I  beg  leave  to  recommend  to  the  Public  Lighting  Com- 
mittee that  the  price  of  a  6.6  ampere  magnetite  arc  light, 
burning  3,770  hours  per  year,  be  fixed  at  $65.68. 

Very  respectfully, 

WM.  D.  MARKS, 

Consulting  Engineer. 
To  HON.  WM.  HOOKER,  CH. 


CHAPTER  IV. 
QUANTITY  RATES  FOR  ELECTRICITY. 

In  the  preceding  chapter  the  natural  law  of  prices  has  been 
carefully  traced  for  the  conditions  obtaining  in  Minneapolis. 

This  law  has  been  verified  by  testing  it  under  the  intricate 
conditions  as  to  diversity  of  sales  and  uses,  of  the  M .  G.  E. 
Company's  operations. 

The  tabulation  and  diagram  of  the  Even  Profit  curve  of 
prices  give  lucid  directions  for  its  application  to  all  cases. 

The  Commonwealth  Edison  Company  of  Chicago  (one 
of  the  largest  electric  companies  in  the  world)  appears  to 
use  this  natural  law  in  all  of  its  sales,  with  great  satisfaction 
to  its  consumers  and  ever  growing  prosperity  for  itself. 

Nevertheless  objections  are  often  raised  to  keeping  a 
record  of  the  capacity  of  the  connected  load  of  each  consumer, 
and  efforts  are  made  by  means  of  "cut  and  try  guesses"  to 
fix  a  satisfactory  quantity  scale  of  prices,  which  will  sell 
electricity  by  monthly  quantities  regardless  of  the  installed 
capacity  of  consumers. 

The  Minneapolis  figures  of  the  preceding  chapter  will  be 
used  for  the  demonstration  of  quantity  rates. 

This  quantity  method  requires  a  division  of  the  fixed 
expenses  amongst  the  meters  as  a  monthly  minimum  charge 
to  each  meter,  and  the  assumption  that  each  kilowatt  hour 
shall  be  loaded  with  its  variable  cost,  its  average  deprecia- 
tion and  its  average  profit. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  115 

By  use  of  the  natural  (and  exact)  law  of  prices  we  have 
obtained  for  the  1910  regimen  of  the  Minneapolis  G.  E.  Co. 
the  following  figures  for  a  uniform  rate  (4.073c.)  which 
would  protect  the  M.  G.  E.  Co.  in  a  profit  of  8  per  cent 
on  its  present  value  of  plant,  and  working  capital — 
($6,500,000.) 

The  full  connected  lood  operated  2.845  hours  per  day, 
307  days: 


Annual  sales,  K.W.  hours 29,177126 

Variable  operating  expense $54,511 . 33  or  0 . 187c.  per  K.W.H. 

Fixed  operating    xpense $463,992.82  "  1.590c.    "         " 

Profit  and  depreciation  (10.3  %)..      670,000 . 00  "  2 . 296c.    " 

Total  price $1,188,504. 15  "  4.073c.    "         " 

Flat  monthly  price  per  K.W.  capacity  (72.83  hrs.) $2 .97 


The  number  of  meters  is  given  as  14,253  but  as  there  are  a 
number  of  unmetered  consumers  it  will  be  more  equitable  to 
assume  15,000  consumers  and  charge  each  a  meter  per  month 
although  the  meter  is  omitted. 

The  fixed  bill  per  meter  per  year  for  service  is  $30.93  and 
per  month  $2.58  for  each  consumer. 

The  variable  bill  is  for  the  commodity: 

For  variable  operating  expense 0. 187c.  per  K.W.H. 

For  profit  and  depreciation 2.296c.     "       " 

Total  for  commodity 2.483c.    " 

If  the  public  were  sufficiently  intelligent  or  thoughtful 
to  be  able  to  recognize  the  distinction  between  the  service 


116  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

and  the  commodity  purchase  necessarily  involved  in  con- 
ducting a  plant  always  operating  and  fully  manned  for  their 
service,  the  acceptable  method  would  be  to  charge  separately 
for  each  as  follows: 

For  monthly  service $2 . 58 

For  electricity  for  power  use 2.5c.  per  K.W.H. 

But  such  does  not  appear  to  be  the  case. 

For  this  reason  some  public  service  corporations  have 
established  stepped  rate  methods  of  charging. 

In  the  previous  chapter  the  rate  arises  from  adding  the 
fixed  cost  of  service  to  the  profit  and  depreciation  on  the 
portion  of  the  plant  required  by  a  consumer;  plus  the  vari 
able  cost  of  the  current. 

In  the  present  case  of  quantity  rates  the  rate  arises  from 
the  cost  of  service;  plus  the  variable  cost  of  current  added 
to  the  average  profit  and  depreciation  per  kilowatt  hour 
deduced  from  1910. 

The  feature  of  this  quantity  rate  in  whch  it  differs  from 
the  natural  rate  for  a  given  regimen  1910  is  that  the  future 
profit  and  depreciation  of  plant  extensions  are  covered  by  it. 

Dividing  29,177,126  kw-hours  by  15,000  consumers  and  by 
12  months  we  have  the  sales  per  meter  month  of  162.1 
kw-hours  corresponding  to  the  regimen  of  1910,  assuming  a 
meter  for  each  consumer. 

If,  as  we  must  for  consist  ant  quantity  rates,  we  assume 
the  average  sales  per  meter  month  to  be  proportional  to  the 
total  annual  sales,  actual  or  assumed,  we  have  the  follow- 
ing tabulation. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT        117 
COMPARISON  OF  NATURAL  AND  QUANTITY  RATES  1910 


Natural  Rates 

Quantity 

Rates 

Tot  1 

Sales  per 

Hours 

Cents 

Annual 

Meter 

Cents 

Day 

Rate  per 
K.W.H. 

Sales 
K.W.H. 

Month 
K.W.H. 

Rate  per 
K.W.H. 

2.845 

4.073 

29,177,126 

162.095 

4.073 

1. 

11.244 

10,255,580 

56.975 

7.007 

2. 

5.715 

20,511,160 

144.000' 

4.745 

3. 

3.873 

30,766,740 

171.000 

3.991 

4. 

2.951 

41,022,320 

228.000 

3.614 

5. 

2.398 

51,277,900 

285.000 

3.388 

6. 

2.030 

61,533,480 

342.000 

3.237 

7. 

1.766 

71,789,060 

399.000 

3.129 

8. 

1.569 

82,044,640 

456.000 

3.048 

9. 

1.415 

92,300,220 

513.000 

2.986 

10. 

1.293 

102,555,800 

570.000 

2.935 

12. 

1.108 

123,066,960 

684.000 

2.860 

H 

22.301 

5,127,790 

28.000 

11.531 

0 . 000      $2 . 84  per  K.W.  connected  0  to  22  $2.58  per  meter  month 

In  the  diagram  the  two  rates  are  drawn  as  curves  to  show 
the  relative  prices,  N.  N.  depicts  the  natural  and  exactly 
fair  rate  C.  C.  depicts  the  approximate  quantity  or 
commodity  rate. 

At  no  point  will  this  quantity  rate  ever  allow  prices  to 
fall  below  2.483c.  per  kw-hour  while  the  natural  and  logical 
rate  (8  per  cent  and  2.3  per  cent  depreciation  included) 
falls  as  low  as  0.574c.  per  kw-hour  for  current  furnished 
without  interruption. 

We  have  learned  that  in  1910  with  an  average  of  162 
K.  W.  H.  per  meter  per  month  that  4.1c.  per  K.  W.  H.  is  a 
fair  and  profitable  rate.  We  also  see  that  this  rate  cannot 
fall  below  2.483c.  per  K.  W.  H.  on  the  quantity  scale  of 
prices. 


118 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  119 

If  now  we  seek  a  ready  means  of  fixing  prices  on  the  com- 
modity scale  with  rude  accuracy,  which  shall  protect  the 
Electric  Company  in  its  averages,  we  have  the  following 
step  rate  per  meter  per  month. 


For  the  first  30  K.W.H. 

For  the  excess  over  30  K.W.H. 

Taking  the  average  sale  per  meter  per  month  162  K.W.H. 


30  K.W.H.  at  ll^c.-  $3.45 

132        «         «     2c  ..........................         3.30 


162                  «     4.1c $6.75 

For  400  K.W.H.  per  month: 

30  K.W.H.  at  llj^c $3.45 

370         «         «     2c 9.25 


400                  «     3.15c $12.60 

For  684  K.W.H.  per  month: 

30  K.W.H.  at  llj^c $3.45 

654         «         «     2c 16.35 


684         «         «     2.9c $19.80 

It  is  obvious  that  this  Quantity  rate  cannot  be  successfully 
used  in  large  power  contracts,  or  for  all  night  street  lighting 
but  it  will  appeal  to  small  users  of  electricity  because  it 
appears  to  reduce  rates  to  short  hour  users  at  the  expense  of 
consumers  averaging  higher. 

A  comparison  of  the  commodity  curve  C.C.  with  the 
natural  curve  of  even  profits  N.N.  will  make  this  clear. 

We  can  verify  this  rules  results  by  rough  estimates  as 
follows  (see  previous  chapter  for  data) : 


120  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Classes  Estimated        Annual 

Meters  Sales 

Incandescent  K.W.H 12,979  12,104,913 

Commercial  power  K.W.H 1,509  14,234,213 

Street  arc  K.W.H 512    2,838,000 


Total 15,000  29,177,126 

Incandescent    sales    per    estimated    meter 

month  K.W.H 77.7  Rate  5.97 

Comm.  power  sales  per  estimated  meter 

month  K.W.H 786.0  «  2.84 

Street  arc  sales  per  estimated  meter 

month  K.W.H 462.0     «     3.08 

Proof 

12,104,913  at  5.97c $722,663.31 

14,234,213  at  2.84c 404,251.65 

2,838,000  at  3.08c 87,410.40 


$1,214,325.36 
Check  (basis  of  natural  law) 1,188,504 . 15 


Excess  2  per  cent $25,821 . 21 

The  tendency  of  the  commodity  curve  C.C.  and  of  the 
rule  based  on  it  is  to  increase  the  per  cent  of  profit  with  each 
increase  of  sales  that  does  not  require  additions  to  plant, 
or  if  the  plant  must  be  increased  it  provides  for  the  fixed 
per  cent  of  profit  and  depreciation  of  plant  extensions  which 
in  this  case  is  10.3  per  cent. 

The  natural  curve  N.N.  will  indicate  the  lowest  limit 
of  profitable  operation  if  separate  ventures  into  power 
contracts  or  very  long  hour  lighting  contracts  are  made. 

This  quantity  rule  is  for  current  only,  and  proper  additions 
per  K.  W.  H.  or  to  the  cost  of  the  plant  must  be  considered 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  121 

if  incandescent  lamps  or  street  arc  lamps  are  included  in  the 
price. 

This  discussion  of  quantity  rates  is  given  because  of  the 
persistent  efforts  made  by  some  electric  companies  to  use  it 
blindly  and  by  "cut  and  try  guesses"  to  reach  "all  the 
traffic  will  bear." 

A  very  good  example  of  this  cut  and  try  method  is  found  in 
New  York  City's  electric  service  for  which  the  Company  has 
obtained  the  approval  of  the  New  York  State  Public  Service 
Commission. 

THE  ELECTRICITY  RATES  OF  NEW  YORK  CITY 

Before  proceeding  to  publicly  criticize  the  technical 
education  and  ability  of  the  New  York  City  Public  Service 
Commission,  the  writer  should  make  the  statement  that  he 
has  called  to  the  attention  of  members  of  the  Commission 
and  also  of  the  New  York  Edison  Company,  the  exceeding 
injustice  of  its  rates  to  consumers  of  small  quantities,  and 
that  he  has  not  had  from  either  party  any  rational  and 
practical  answer  to  his  objections  to  the  existing  rates  in 
force  in  New  York  City. 

As  a  fact  the  responsibility  for  these  rates,  legally  rests 
entirely  upon  the  Public  Service  Commission  of  the  First 
District  of  New  York,  and  only  morally,  and  as  a  matter  of 
good  business  judgment,  upon  the  New  York  Edison  Com- 
pany. 

Perhaps  the  most  extraordinary  statistical  concoction  ever 
issued  by  a  Public  Service  Commission  as  a  report,  is  Volume 
IV.  1910.  Report  of  the  Public  Service  Commission  for  the 
First  District  of  New  York  State. 


122  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Instead  of  reprinting  the  financial  reports  of  the  few 
companies  under  its  care  as  does  the  Massachusetts  Com- 
mission, it  has  dismembered  them  and  recapitulated  by 
boroughs,  the  different  amounts  of  electrical  apparatus  in 
each  borough. 

Instead  of  confining  its  report  to  the  facts  and  figures  of 
the  corporations  controlled,  we  are  further  given  as  a  preface, 
a  most  amazing  general  essay  on  "Load  Factors  and  Rates" 
which  is  so  obscure,  as  to  defy  comprehension  by  the  expert, 
and  is  misleading  to  the  inexpert. 

Naturally  at  the  outset  of  the  service  of  the  Members  of 
this  Commission,  appointed  apparently  without  regard  to 
technical  education  or  experience,  they  had  to  learn,  and  we 
all  expect  errors  from  learners,  but  in  1912  the  time  for 
deliberate  errors  should  have  gone  by  (The  Report  for  1910 
IV  Volume  was  issued  November  1912.) 

However  it  is  to  this  long  delayed  publication  that  we  must 
have  recourse  for  our  facts. 

Perhaps  this  is  not  altogether  a  misfortune  since  these 
figures  should  have  formed  the  basis  for  the  electricity  price 
lists  issued  by  the  New  York  Edison  Company,  July  1,  1911, 
and  still  in  force  December  21,  1912. 

The  data  required  for  a  general  discussion  of  rates  is  as 
follows : 

Vol.  IV  (1910) 

page 

268  Connected  load 

Company's  services  K.W 542 

Arc.  lights  "     17,760 

Street  arc  lights  3,571 

Vapor  arcs  "     511 

Incandescent  lights       "     201,585 


Forward,         223,969 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  123 

Vol.  IV  (1910) 

page  Brought  Forward,  223,969 

Batteries  "  6,570 

Motors  "  197,647 


Total  «     428,186 

271  Station  capacity  K.W 173,100 

276  Total  annual  sales  K.W.H 288,084,122 

599  Total  annual  gross  earnings $18,051,105.77 

599  Total  operating  expense 10,685,241 . 38 

365  Included  in  the  operating  expense  are  two  items 
requiring  consideration,  viz.: 

Materials,  supplies  and  incidentals $1,395,820.78 

General  amortization 2,381,483 .22 

The  total  present  structural  value  of  a  plant  of  a  capacity 
of  173,100  K.W.  located  in  New  York  City  is  estimated  at 
less  than  $60,000,000  so  that  the  amortization  charge  of 
3.9  per  cent  of  cost  may  be  allowed  to  remain  as  fair  residual 
depreciation  for  one  year. 

The  materials  etc.,  $1,395,820.78  (or  0.484c.  per  K.W.H.) 
is  proportional  to  the  load. 

The  remainder  of  the  operating  expense,  or  $9,289,420.60 
is  fixed  and  independent  of  daily  variations  of  the  station 
load. 

NEW  RATES  EFFECTIVE  JULY  1,  1911,  FOR  MANHATTAN  AND 
THE  BRONX. 

The  New  York  Edison  Company,  and  the  United  Electric 
Light  and  Power  Company,  the  former  operating  in  the 
Boroughs  of  Manhattan  and  the  Bronx,  and  the  latter  in  the 
Borough  of  Manhattan,  have  issued,  to  take  effect  July  1, 
1911.  a  schedule  of  rates  which  cancels  their  Retail  Light, 
Retail  Power,  Intermediate  Wholesale,  Special  Wholesale, 
Automobile  and  Storage  Battery  rates.  In  addition,  the 
New  York  Edison  Company,  has  cancelled  its  Wholesale  and 


124  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Special  Wholesale  rates  for  the  Bronx  district.  The  two 
companies  have  substituted  for  the  rates  cancelled  the 
following  rates: 

GENERAL  RATE  —  AVAILABLE  FOR  ALL  CONSUMERS 


The  first           250  K.W.H. 

of  monthly  consumption  at 

lOc. 

Next                 250        u 

"                     250        u 

u                       u                a 

9c. 

8c. 

250 
"                     500       " 

u                        u                 u 

7c. 

6c 

Excess  over  1,500       " 
excess  .  . 

"     for   the 

5o. 

These  rates  include  the  supply  and  the  renewal  of  all 
standard  incandescent  lamps,  and  carbons  for  and  trimming 
of  arc  lamps,  or  an  equivalent  allowance  in  the  price  of 
Tungsten  or  Tantalum  lamps.  Where  of  advantage  to  the 
consumer,  power  may  be  included  under  the  general  or 
wholesale  rate. 

Consumers  making  a  yearly  contract,  who  agree  to  an 
average  monthly  use  of  not  less  than  1,500  K.W.H.  ,  including 
power  if  desired,  may  renew  their  own  incandescent  lamps, 
supply  carbons  for  and  trim  their  arc  lamps,  and  otherwise 
care  for  their  installations,  and  for  so  doing  will  receive  a 
special  discount  of  J^c.  a  K.W.H. 

POWER  RATE. 

The  first  200  K.W.H.  of  monthly  consumption  at  ........  9.5c. 

Next  200  "  "  u  ........  Sc. 

2,500        "  "  "  "   ........  6c. 

Excess  over  2,900        "  "     for   the 

excess  .  .  .  5c. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT        125 

WHOLESALE  RATE. 

First  100,000  K.W.H.  yearly  consumption  at 5c. 

Next  100,000       «  «  «  « 4c. 

Over  200,000       "        excess  yearly  « 3c. 

500,000  K.W.H.  yearly  consumption  not  to  exceed $17,500.00 

625,000          «  «  u  "  "      20,000.00 

833,333          "  "  u  u  "      25,000.00 

Yearly  guarantee,  Manhattan,  100,000  K.W.H;  Bronx, 
60,000  K.W.H. 

AUTOMOBILE,  STORAGE  BATTERY  AND  REFRIGATION  RATE. 

The  first       2,500  K.W.H.  of  monthly  consumption  at 5c. 

Next  2,500       "  u  "  "  4c. 

Excess  over  5,000       "  "  "     for   the 

excess 3c. 

This  rate  is  dependent  upon  a  minimum  monthly  bill  of 
$25.00  and  includes  the  agreement  that  where  the  use  of 
current  does  not  exceed  50,000  K.W.H.  monthly,  the  cost 
shall  not  exceed  $1,500. 

NEW  YORK  CITY  RATE  FOR  AQUEDUCT,  TUNNEL  OR  SUBWAY 
CONSTRUCTION. 

Alternating  current  6300-6600  volts,  25  cycles,  33-phase, 
shall  be  supplied  at  each  or  any  of  the  shaft  sites  of  the  cus- 
tomer. 

The  price  for  this  current  shall  be : 

For  each  K.W.H  of  maximum  demand  upon  the  system 
of  the  company  twenty  ($20.00)  dollars  annually.  The 
charge  of  twenty  ($20.00)  dollars  is  to  be  made  and  paid  pro 
rata  at  the  rate  of  one  dollar,  sixty-six  and  two-thirds  cents 
($1.66  2-3)  monthly  for  each  K.W.  of  demand. 

For  each  K.W.H.  of  current  actually  consumed,  as 
recorded  by  the  company's  meters,  one  (Ic.)  cent. 


126  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Where  is  it  found  inadvisable  or  impracticable  to  use  high 
tension  current,  low  tension  current — 120-240  volts — will  be 
supplied  at  the  rate  of  two  and  one-half  (2J^c.)  cents  per 
K.W.H.  for  the  current  actually  consumed,  as  recorded  by 
the  company's  meters. 

The  maximum  demand  for  service  rendered  under  this 
contract  in  each  yearly  period  shall  be  not  less  than  200  K.W. 

To  give  at  a  glance  a  more  comprehensive  grasp  of  the 
variation  of  each  of  these  price  lists  they  have  been  put  in 
graphic  form. 

Diagram  1.  General  rate  available  for  all  consumers. 

Diagram  2.  Power  rate 

Diagram  3.  Wholesale  rate 

Diagram  4.  Automobile  storage  battery  and  refrigeration 
rate. 

It  will  be  noticed  that  the  stepped  prices  for  successive 
quantities  of  electricity  always  results  in  an  average  rate 
considerably  higher  than  the  stepped  prices  save  at  the 
origin. 

For  instance  in  the  "General  rate"  (Diagram  1.)  the 
lowest  stepped  price  6c.  per  K.W.H.  corresponds  to  an 
average  of  7.67c.  per  K.W.H. 

This  average  result  is  generally  true  in  all  stepped  rate 
price  lists.  Considering  the  bulk  operating  expenses  required 
to  produce  and  sell  288,084,122  K.W.H.  we  have: 

Fixed  operating  expenses  $9,289,420.60  or  3.225c.per  K.W.H. 
Proportional     operating 

expenses $1,395,820.78  or  0.484c.per  K.W.H. 

Total $10,685,241.38  and  3.709c. 

That  is  to  say  with  sales  of  288,084,122  K.W.H.  in  1910. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


127 


128 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


129 


mm 


ill 


130  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


!  ^ 
I  K 


I  i 


^ 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  131 

The  operating  expense  due  to  fixed  expenses  were  3.225c. 
and  to  proportional  expense  0.484c.  making  a  total  of  3.709c. 
per  K.W.H.  cost. 

Included  in  fixed  expense  is  "Utilization  Expense"  $818, 
949.96  (page  362)  or  0.283c.  per  K.W.H.  which  appears  to 
be  for  labor  and  material  for  an  indeterminate  portion  of  the 
station  load  and  for  the  total  load,  its  changes  do  not  appear 
to  be  proportional  to  the  sales  but  rather  as  a  fixed  operating 
expense,  and  has,  therefore,  been  included  in  it  for  the 
present  purposes — giving  3.709c.  per  K.W.H.  as  a  final 
inclusive  total. 

For  power  sales  only  we  would  have : 

Fixed  operating  expense 3.225c.  per  K.W.H. 

Less  utilization  expense 283c.     "        " 


Fixed  expense 2 . 942c. 

Proportional .     .  484c. 


Total  expense 3 . 426c.    "        " 

Since  in  the  cost  of  electricity,  we  have  two  factors — first 
daily  or  yearly  fixed  expenses,  second,  an  expense  for  fuel, 
etc.,  (called  materials,  supplies  and  incidentals)  (page  369), 
increasing  or  decreasing  with  the  burden  on  the  electric 
station,  which  we  have  called  yearly  sales,  we  must  de- 
termine for  what  time  and  to  what  extent  the  capacity  of  the 
station  or  the  capacity  of  the  connected  load  is  operated. 

The  total  hours  for  a  year  are 8760 

«     sales     "   "       «       « 288,084,122  K.W.H. 

"     connected  load  is 428,  186K.W. 

Average   hours   of   operation   of   the 

connected  load  per  year  (about) .  .  .  672 . 8 

Per  day  (year  of  307  work  days)  hrs .  .  2 . 192 


132  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

(Report  page  274).  By  reason  of  the  diversity  of  uses  of 
electricity  by  the  connected  load,  the  greatest  demand  upon 
the  Edison  stations  in  1910  was— for  A  and  B  151,800  K.W. 
The  total  nominal  capacity  of  this  company's  stations  is 
given  as  173,100  K.W.  and  this  could  probably  have  been, 
increased  50  per  cent  for  two  hours  of  peak  loads  without 
injury  to  the  machinery  (page  271).  Up  to,  say  250,000 
K.W. 

There  are  large  apparent  losses  between  the  electric  power 
generated  and  the  electric  power  sold,  but  as  in  this  commer- 
cial criticism  of  rates,  the  amount  sold  is  our  basis,  it  is  not 
necessary  to  discuss  these  losses. 

The  capacity  of  these  stations,  being  nominally  173,100 
K.W.,  it  would  be  necessary  to  operate  them  for  1,681.7 
hours  per  year,  to  generate  288,084,122  K.W.H.  Hours 
per  day  (307  work  days  per  year)  5.48. 

We  can  now  dismiss  the  capacity  (173,100  K.W.)  and  the 
time  required  per  day  (5.48  hrs.)  of  it,  as  being  amply  mar- 
gined in  the  installation  of  machines  in  stations,  for  if 
practical  requirements  could  be  adapted  to  a  uniform  station 
load,  there  could  be  produced  each  year  173,100  K.W,  by 
8,760  hours  or  1,516,356,000  K.W.H. 

Is  an  electric  station  a  public  servant  entitled  to  charge  for 
its  service  a  profit  on  its  investment  and  for  its  operating 
expenses,  dependent  upon  its  hours  and  days  of  service? 

Or  is  it  a  vendor  of  a  commodity  (electricity)  entitled  to 
charge  a  profit  on  the  quantity  of  that  commodity  sold  re- 
gardless of  other  factors? 

Since  the  only  correct  method  of  obtaining  the  cost  of 
electric  service  is  by  regarding  the  time  of  service  and  the 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  133 

investment,  I  am  of  the  opinion  that  the  electric  station  is  a 
public  servant  and  fairly  entitled  to  render  bills  for  service 
on  that  basis. 

The  general  public  accustomed  to  trading  in  commodities, 
however,  always  have  a  preference  for  dealings  on  the  basis 
of  quantity,  with  a  discount  to  wholesale  purchasers. 

This  arises  from  the  fact  that  most  of  our  merchants, 
trading  in  rented  stores  and  having  no  large  investment, 
have  found  it  practically  profitable  to  give  large  discounts 
for  large  sales,  and  have  permanently  acquired  and  adopted 
that  point  of  view. 

In  case  of  a  possibly  competitive  or  wholesale  purchaser  of 
electricity  the  electric  station  manager  may  find  himself 
compelled  to  regard  electricity  as  a  commodity. 

For  this  reason  I  have  endeavored  elsewhere  to  add  a 
consistant  commodity  scale  of  prices  to  the  service  scale  of 
prices  properly  computed. 

In  its  guarded  monopoly,  secure  from  the  healthy  cor- 
rective of  competitive  commercial  warfare,  the  tendency  of 
most  public  service  corporations  is  to  extort  from  small 
consumers  to  cover  losses  from  large  ones  who  otherwise 
would  be  competitors,  at  least  for  their  own  uses. 

For  the  purpose  of  getting  the  price  of  current  only  in 
computing  even  profit  rates  for  electricity,  I  shall  omit 
" Utilization  Expense"  and  allow  to  the  New  York  Edison 
Company,  a  lump  annual  profit  of  $4,800,000  on  its  plant 
and  working  capital  (8%  on  $60,000,000.00). 

For  the  year  1910  we  have  the  following  computations : 

The  full  connected  load  operated  daily  2.192  hours  for 
307  days. 


134  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Annual  sales  K.W.H 288,084,122 

Proportional  operating  expense  $  1 ,395,820 . 78  per  K.W.H.       0 . 484c. 
Fixed  "  "  8,470,470.64    «  a  2.940c. 

Profit  4,800,000.00    "  1.666c. 

Fair  total  price $14,666,291 . 42    «  «  5 . 090c. 

Flat  monthly  payment  per  K.W.  capacity  (56.12  hrs.) $2.86 

The  New  York  Edison  Company  with  a  gross  earning  of 
$18,051.77  collected  6.266c.  per  K.W.  1910  which  gave  an 
excess  of  $2,565,864.39  greater  than  a  fair  profit  of  $4,800,000 
on  its  structural  value  and  working  capital. 

Inclusive  of  utilization  expenses  it  reported: 

Total  annual  gross  earning $18,051,105.77 

Total  operating  expense 10,685,241 . 38 

Net  annual  earnings $7,365,864.39 

The  full  connected  load  operated  daily  one  hour  for  307 
days. 

Annual  sales 131,425,237 

Proportional  operating  expense        $636,779 . 50 

Fixed  8,470,470 . 64  per  K.W.H.       6 . 929c. 

Profit 4,800,000. 00 

Fair  total  price $13,907,250 . 14    "  «          10 . 581c. 

Flat  monthly  payment  per  K.W.  capacity  (25.6  hrs.) $2.71 

The  full  connected  load  operated  daily  2  hours  for  307 
days. 

Annual  sales  K.W.H 262,850,474 

Proportional  operating  expense     $1,273,559.00 

Fixed  8,470,470 . 64  per  K.W.H.       3 . 707c. 

Profit 4,800,000.00 

Fair  total  price $14,544,029 . 64  per  K.W  .H.       5 . 533c. 

Flat  monthly  payment  per  K.W.  capacity  (51.2  hrs.) $2.83 

The  full  connected  load  operated  daily  3  hours  for  307 
days. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  135 

Annual  sales  K.W.H 394,275,711 

Proportional  operating  expense    $1 ,910,338 . 50 

Fixed  8,470,470 . 64  per  K.W.H.       2 . 632c. 

Profit 4,800,000.00 

Fair  total  price $15,180,809 . 14     «  u  3 . 850c. 

Flat  monthly  payment  per  K.W.  capacity  (76.8  hrs.) $2 .96 

The  full  connected  load  operated  daily  4  hours  for  307 
days. 

Annual  sales  K.W.H 525,700,948 

Proportional  operating  expense    $2 , 547 , 1 1 8 . 00 

Fixed  8,470,470 . 64  per  K.W.H.       2 . 095c. 

Profit 4,800,000.00 

Fair  total  price $15,817,588 . 64     "  "  3 . 009c. 

Flat  monthly  payment  per  K.W.  capacity  (102.4  hrs.) $3 .08 

The  full  connected  load  operated  daily  5  hours  for  307 
days. 

Annual  sales  K.W.H 657,126,185 

Proportional  operating  expense    $3, 183,8  97 . 50 

Fixed  8,470,470 . 64  per  K.W.H.       1 . 773c. 

Profit 4,800,000.00 

Fair  total  price $16,454,368 . 14     «  "  2 . 504c. 

Flat  monthly  payment  per  K.W.  capacity  (128  hrs.) 3.21 

The  full  connected  load  operated  daily  6  hours  for  307 
days. 

Annual  sales  K.W.H 788,551,422 

Proportional  operating  expense    $3 , 820,677 . 00 

Fixed  8,470,470 . 64  per  K.W.H.        1 . 558c. 

Profit 4,800,000.00 

Fan-  total  price $17,091,147 . 64     «  «  2 . 167c. 

Flat  monthly  payment  per  K.W.  capacity  (153.6  hrs.) $3.33 


136  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

The  full  connected  load  operated  daily  7  hours  for  307 
days. 

Annual  sales  K.W.H 919,976,659 

Proportional  operating  expense    $4,457,456 . 50 

Fixed  8,470,470 . 64  per  K.W.H.       1 . 405c. 

rofit 4,800,000.00 

Fair  total  price $17,727,927.14    «          «  1.927c. 

Flat  monthly  payment  per  K.W.  capacity  (179.2  hrs.) $3.45 

The  full  connected  load  operated  daily  8  hours  for  307 
days. 

Annual  sales  K.W.H 1,051,401,896 

Proportional  operating  expense    $5,094,236 . 00 

Fixed  8,470,470 . 64  per  K.W.H.        1 . 290c 

Profit 4,800,000.00 

Fair  total  price $18,364,706 . 64     "          a  1 . 746c. 

Flat  monthly  payment  per  K.W.  capacity  (204.8  hrs.) $3 . 58c. 

The  full  connected  load  operated  daily  9  hours  for  307 
days. 

Annual  sales  K.W.H 1,182,827,133 

Proportional  operating  expense     $5,731,015.50 

Fixed  8,470,470 . 64  per  K.W.H.       1 . 200c. 

Profit 4,800,000.00 

Fair  total  price $19,001,486 . 14     "  "  1 . 606c. 

Flat  monthly  payment  per  K.W.  capacity  (230.4  hrs.) $3 . 70 

The  full  connected  load  operated  daily  10  hours  for  307 
days. 

Annual  sales  K.W.H 1,314,252,370 

Proportional  operating  expense .  $6,367,795 . 00 

Fixed  u       .     8,470,470. 64  per  K.W.H.       1.128c. 

Profit $4,800,000.00 

Fair  total  price $19,638,265 . 64     «  «  1 . 494c. 

Flat  monthly  payment  per  K.W.  capacity  (256  hrs.) $3 . 82 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  137 

The  full  connected  load  operated  daily  12  hours  for  307 
days. 

Annual  sales  K.W.H 1,577,102,844 

Proportional  operating  expense.  $7,641,354.00 

Fixed  «       .     8,470,470. 64  per  K.W.H.       1.021c. 

Profit $4,800,000.00 

Fair  total  price $20,911,824 . 64     «  «  1 . 326c. 

Flat  monthly  payment  per  K.W.  capacity  (307.2  hrs.) $4 . 07c. 

The  full  connected  load  operated  daily  24  hours  for  365 
days. 

Annual  sales  K.W.H 3,750,087,713 

Proportional  operating  expense. $18,169,866. 25 

Fixed  "  "  8,470,470. 64  per  K.W.H.          .710c. 


Profit $4,800,000.00 

Fair  total  price $31,440,336 . 89     "  "  .  838c. 

Flat  monthly  payment  per  K.W.  capacity  (730  hrs.) $6 . 12 

The  full  connected  load  operated  daily  J^  hour  for  307 
days. 

Annual  sales  K.W.H 65,712,618 

Proportional  operating  expense .      $318,389 . 75 

Fixed  «       .     8,470,470. 64  per  K.W.H.     13.374c. 

Profit 4,800,000.00 

Fair  total  price $13,588,860 . 39     "  "         20 . 679c. 

Flat  monthly  payment  per  K.W.  capacity  (12.8  hrs.) $2 . 65 

The  full  connected  load  cut  off.     No  current  used. 

Total  connected  load  K.W 428,186 

Fixed  operating  expense $8,470,470 . 64 

Profit 4,800,000.00 

Total  price $13,270,470.64  per  K.W.H.      $30.99 

Flat  monthly  payment  per  K.W.  connected  load $2 . 58 


138  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Objections  have  been  raised  to  the  above  method  of  com- 
putation on  the  ground  that  the  connected  loads,  assumed 
in  K.W.H.,  cannot  be  operated  by  the  station  power  in- 
stalled. To  all  arithmetical  computations  the  same  objec- 
tion can  be  raised.  If  the  reader  will  take  the  trouble  to 
reverse  my  operations  after  segregating  the  various  classes 
of  utilizations  and  their  hours  of  use,  he  will  find  that  the 
method  verifies  itself  when  applied  to  the  actual  operation  of 
the  station.  (See  Chapter  III.) 

Diagram  5  gives  the  cost  and  price  curves  for  electricity, 
embodying  a  recapitulation  of  all  of  the  above  computations, 
in  detail,  with  the  rule  for  the  use  of  the  table. 

Regarding  the  New  York  Edison  Company  as  a  public 
servant  only,  a  public  service  commission  would  have 
reached  the  following  conclusions: — 

Each  consumer  should  be  charged  a  minimum  rate  of 
$2.58  for  each  K.W.  of  capacity  installed  if  using  no  current. 
For  a  daily  use  of  each  K.W.  installed  for  one  hour,  the  rate 
would  be  about  lie.  per  K.W.H.  with  lamps  or  a  monthly 
payment  of  $2.71  for  current.  For  a  daily  use  of  his  K.W. 
installed  for  10  hours,  the  rate  would  be  about  2c.  witR  lamps 
per  K.W.H.  or  a  monthly  payment  of  $3.82  for  current  only. 

With  commercial  adequacy  the  rates  for  electric  power  are 
given  on  the  basis  of  hours  of  use  for  all  usual  conditions  in 
Diagram  5.  The  addition  of  J^c.  per  K.W.H.  of  these  base 
rates  provides  for  the  free  renewal  of  incandescent  lamps  and 
for  trimming  arc  lights,  called  "Utilization  Expense." 

The  commodity  scale  of  prices  is  not  judicially  fair  even 
when  figured  out  carefully — it  is  a  compromise  making  rates 
per  K.W.H.  too  low  to  small  consumers,  and  too  high  to 
large  consumers — by  reason  of  a  reduction  of  the  true  fixed 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


139 


re/ar/on-s       of    hot 


A/EW     YORK    EDISON    COMPANY 

^   &    pt/b/sc  ^serrant. 


//oi/r-j  of  afa/y  use  307  a/ay^  per  year 


140  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

expenses  and  an  increase  of  the  true  proportional  expenses, 
but  if  used,  may  only  be  consistently  applied  under  the 
assumption  that  increased  sales  require  increased  plant. 

There  is  no  consistent  or  rational  or  practical  method  of 
underlying  these  random  quantitative  rates  approved  by 
the  Public  Service  Commission,  which  rob  the  great  multi- 
tude of  small  consumers  and  forego  equal  profits  from  the 
large  consumers  whether  you  treat  the  rates  fixed  either  as 
payments  for  services  or  for  a  commodity. 

The  true  service  price  curve  under  the  assumption  of  an 
average  3.52  K.W.  installation  per  meter  consumer  is  shown 
to  prove  the  fallacy  of  the  New  York  Edison  Company's 
published  statement. 

"The  former  system  of  charging  based  upon  average  daily 
hours  use  of  connected  installation,  has  been  discarded  and 
the  character  and  size  of  the  installation  will  therefore  cease 
to  be  a  factor  in  determining  the  cost  of  current." 

The  Commission  has  permitted  the  New  York  Edison 
Company  to  abandon  all  system  and  to  charge  consumers 
all  they  think  "the  traffic  will  bear." 

No  one  has  ever  successfully  disputed  the  judicial  fair- 
ness of  the  public  service  rates  "discarded."  They  have  for 
years  when  properly  applied,  proved  their  correctness  in 
actual  practice.  See  Diagram  5. 

Because  the  public  are  trained  to  the  gas  companies' 
methods  of  charging  for  quantity  it  might  properly  be  con- 
sidered tactful  by  some  to  use  a  commodity  system  of  rates, 
giving  the  same  protection  to  the  producing  company  in  its 
total  profits. 

Almost  any  consistent  system  is  better  than  no  system  at 
all  in  making  rates.  The  rates  of  the  New  York  Edison 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  141 

Company  are  utterly  irrational  and  this  Company  has  been 
turned  loose  to  wander  at  will  over  the  field  of  its  guarded 
monopoly,  by  the  New  York  City  Public  Service  Com- 
mission. 

What  its  profits  have  been  since  in  1910,  is  not  known  to 
the  public,  owing  to  the  inexcusable  delays  of  this  Com- 
mission in  printing  its  reports. 

In  the  writer 's  opinion,  the  New  York  Edison  Company 's 
proper  profits  should  not  have  exceeded  $4,800,000  and  the 
Public  Service  Commission  should  have  established  rational 
and  practical  rates,  giving  citizens  of  New  York  the  benefit 
of  $2,500,000  and  preventing  future  extortion. 

It  should  have  adhered  to  a  tested  and  practically  fair 
system  until  some  equally  rational  and  simpler  system  than 
the  " discarded"  public  service  rate  giving  even  profits  to 
the  producer  was  presented. 

Making  a  few  comparisons,  let  us  see  the  results. 

A  consumer  has  introduced  20  (50  watt)  incandescent  lights 
in  his  installation,  it  is  1  K.W.  with  free  lamps. 

If  he  burns  these  four  hours  a  night  for  one  month  25.6 
days,  he  uses  102.4  K.W.H. 

New  York  Edison  rate 

102  K.W.H.  at  lOc $10.20 

Diagram  5,  Public  Service  Rate 

102.4  K.W.H.  at  3.5c(^c.  per  K.W.H. 

for  lamps) 3 . 59 


Extortion  for  one  month $6.61 

A  consumer  uses  a  5  tLP.  (3.75  K.W.)  motor  ten  hours  per 
day  for  one  month  (25.6  days)  requiring  960  K.W.H. 


142  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

New  York  Edison  rate 

200  K.W.H.  at  9j^c $19.00 

200       "         "     8c 16.00 

560       «         «     6c..  33.60     $68.60 


Diagram  5,  Public  Service  rate 

960  K.W.H.  at  l^c 14.20 


Extortion  for  one  month $54 . 40 

For  service  if  the  20  light  consumer  had  not  used  them  at 
all,  he  would  have  had  to  pay  $2.58  and  if  the  5  H.P.  motor 
user  had  let  it  remain  idle,  he  would  have  had  to  pay  a 
minimum  charge  of  $9.68  to  protect  the  New  York  Edison 
Company  in  a  fair  profit. 

You  see  the  real  user  of  light  and  power  in  New  York  City 
is  subject  to  grinding  extortion  to  pay  excessive  profits  and 
for  the  service  of  customers,  using  light  and  power  only  at 
long  intervals,  as  a  convenience  or  a  luxury.  Even  if  he  were 
charged  reasonable  rates,  as  he  is  not,  if  those  not  really 
needing  light  or  power,  do  not  pay  a  minimum  charge  for 
readiness  to  serve  on  the  part  of  the  Company,  the  real  user 
must  be  overcharged  to  pay  for  idle  installations  and  protect 
the  public  service  company. 

Take  as  many  instances  as  you  please,  in  nearly  every  one 
by  the  service  or  commodity  rates  the  small  installation  is 
robbed  and  the  large  one  gets  off  without  paying  equal 
profit  or  price  for  electricity  under  the  random  rates  of  the 
New  York  Edison  Company. 

What  can  this  Commission  plead  as  an  apology  for  suffer- 
ing such  injustice  to  be  perpetrated  upon  the  weak  for  years 
under  its  rule? 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  143 

The  vastness  of  our  great  monopolistic  corporations  practi- 
cally prevents  the  individual  from  protecting  himself. 

The  state  has  appointed  this  Commission  and  made  it  its 
sole  duty  to  protect  the  public,  and  do  right  by  the  public 
service  corporations. 

The  political  principle  is  correct  in  its  aims,  but  if  a 
Commission  is  indolent,  ignorant,  inefficient,  timid,  or  cor- 
rupt, it  is  only  a  Lord  of  Misrule  (perhaps  unwittingly)  and 
the  greatest  creation  to  protect  organized  corrupt  practices 
yet  devised  in  our  republic. 

For  the  solution  of  the  problem  of  electric  rates,  there  is 
but  one  right  method,  yet  a  thousand  or  more  incorrect  ways 
have  been  attempted.  The  only  right  way  is  to  obtain  the 
details  accurately  as  they  present  themselves  in  the  opera- 
tion of  an  electric  plant  and  then  to  follow  their  quantitative 
combination  as  they  actually  occur  until  the  natural  law 
controlling  the  cost  and  selling  price  of  electric  power  is 
evolved.  Thus  only  can  all  men  requiring  it,  receive 
judicially  fair  treatment  and  an  equal  opportunity. 


CHAPTER  V. 
METHODS   OF  APPRAISEMENT. 

Very  little  attention  had  been  given  to  methods  of  ap- 
praisement of  public  utilities  of  any  sort  in  the  United  States 
until  about  1900. 

The  water  works  appear  as  the  first  class  of  utilities  to 
receive  the  thoughtful  and  methodical  appraisements  of 
engineers;  these  were  followed  in  turn  by  gas  works  and 
electric  works  and  now  railway  properties  are  being  ap- 
praised 

An  act  of  the  Senate  and  House  of  Representatives  ap- 
proved March  1,  1913  is  subjoined  as  it  is  supposedly  the 
latest  advance  in  the  science  of  appraisement  and  appears 
to  be  sufficiently  broad  to  cover  every  form  of  public  utility, 
prescribing  proper  conditions  for  appraisement. 

PUBLIC— No.  400. 
H.  R.  22,593. 

An  Act  To  amend  an  Act  entitled,  "An  Act  to  regulate 
commerce,"  approved  February  fourth,  eighteen  hundred  and 
eighty-seven,  and  all  Acts  amendatory  thereof  by  providing 
for  a  valuation  of  the  several  classes  of  property  of  carriers 
subject  thereto  and  securing  information  concerning  their 
stocks,  bonds,  and  other  securities. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives 
of  the  United  States  of  America  in  Congress  assembled, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  145 

That  the  Act  entitled  "An  Act  to  regulate  commerce," 
approved  February  fourth,  eighteen  hundred  and  eighty- 
seven,  as  amended,  be  further  amended  by  adding  thereto 
a  new  section,  to  be  known  as  section  nineteen  a,  and  to  read 
as  follows: 

" Section  19a.  That  the  commission  shall,  as  hereinafter 
provided,  investigate,  ascertain,  and  report  the  value  of  all 
the  property  owned  or  used  by  every  common  carrier  sub- 
ject to  the  provisions  of  this  Act.  To  enable  the  commission 
to  make  such  investigation  and  report,  it  is  authorized  to 
employ  such  experts  and  other  assistants  as  may  be  neces- 
sary. The  commission  may  appoint  examiners  who  shall 
have  power  to  administer  oaths,  examine  witnesses,  and 
take  testimony.  The  commission  shall  make  an  inventory 
which  shall  list  the  property  of  every  common  carrier  sub- 
ject to  the  provisions  of  this  Act  in  detail,  and  show  the 
value  thereof  as  hereinafter  provided,  and  shall  classify 
the  physical  property,  as  nearly  as  practicable,  in  conformity 
with  the  classification  of  expenditures  for  road  and  equip- 
ment, as  prescribed  by  the  Interstate  Commerce  Com- 
mission. 

"  FIRST.  In  such  investigation  said  commission  shall 
ascertain  and  report  in  detail  as  to  each  piece  of  property 
owned  or  used  by  said  common  carrier  for  its  purposes  as  a 
common  carrier,  the  original  cost  to  date,  the  cost  of  reproduc- 
tion new,  the  cost  of  reproduction  less  depreciation,  and  an 
analysis  of  the  methods  by  which  these  several  costs  are 
obtained,  and  the  reason  for  their  differences,  if  any.  The 
commission  shall  in  like  manner  ascertain  and  report  separ- 
ately other  values,  and  elements  of  value,  if  any,  of  the  property 
of  such  common  carrier,  and  an  analysis  of  the  methods  of 


146  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

valuation  employed,  and  of  the  reasons  for  any  differences 
between  any  such  value,  and  each  of  the  foregoing  cost 
values. 

"  SECOND.  Such  investigation  and  report  shall  state  in 
detail  and  separately  from  improvements  the  original  cost  of 
all  lands,  rights  of  way,  and  terminals  owned  or  used  for  the 
purposes  of  a  common  carrier,  and  ascertained  as  of  the  time 
of  dedication  to  public  use,  and  the  present  value  of  the  same, 
and  separately  the  original  and  present  cost  of  condemnation 
and  damages  or  of  purchase  in  excess  of  such  original  cost  or 
present  value. 

"  THIRD.  Such  investigation  and  report  shall  show  separ- 
ately the  property  held  for  purposes  other  than  those  of  a  com- 
mon carrier,  and  the  original  cost  and  present  value  of  the 
same,  together  wtih  an  analysis  of  the  methods  of  valuation 
employed. 

"  FOURTH.  In  ascertaining  the  original  cost  to  date  of  the 
property  of  such  common  carrier  the  commission,  in  addition 
to  such  other  elements  as  it  may  deem  necessary,  shall  in- 
vestigate and  report  upon  the  history  and  organization  of  the 
present  and  of  any  previous  corporation  operating  such 
property;  upon  any  increases  or  decreases  of  stocks,  bonds,  or 
other  securities,  in  any  reorganization;  upon  moneys  received 
by  any  such  corporation  by  reason  of  any  issues  of  stocks, 
bonds,  or  other  securities;  upon  the  syndicating,  banking, 
and  other  financial  arrangements  under  which  such  issues 
were  made  and  the  expense  thereof  and  upon  the  net  and 
gross  earnings  of  such  corporations,  and  shall  also  ascertain 
and  report  in  such  detail  as  may  be  determined  by  the 
commission  upon  the  expenditure  of  all  moneys  and  the  pur- 
poses for  which  the  same  were  expended. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  147 

"  FIFTH.  The  commission  shall  ascertain  and  report  the 
amount  and  value  of  any  aid,  gift,  grant  of  right  of  way,  or 
donation,  made  to  any  such  common  carrier,  or  to  any  previ- 
ous corporation  operating  such  property,  by  the  Govern- 
ment of  the  United  States  or  by  any  State,  county,  or  mun- 
icipal government,  or  by  individuals,  associations,  or  cor- 
porations, and  it  shall  also  ascertain  and  report  the  grants 
of  land  to  any  such  common  carrier,  or  any  previous  corpora- 
tion operating  such  property,  by  the  Government  of  the 
United  States,  or  by  any  State,  county,  or  municipal  govern- 
ment, and  the  amount  of  money  derived  from  the  sale  of  any 
portion  of  such  grants  and  the  value  of  the  unsold  portion 
thereof  at  the  time  acquired  and  at  the  present  time,  also, 
the  amount  and  value  of  any  concession  and  allowance 
made  by  such  common  carrier  to  the  Government  of  the 
United  States,  or  to  any  State,  county,  or  municipal 
government  in  consideration  of  such  aid,  gift,  grant,  or 
donation. 

"  Except  as  herein  otherwise  provided,  the  commission 
shall  have  power  to  prescribe  the  method  of  procedure  to  be 
followed  in  the  conduct  of  the  investigation,  the  form  in 
which  the  results  of  the  valuation  shall  be  submitted,  and 
the  classification  of  the  elements  that  constitute  the  ascer- 
tained value,  and  such  investigation  shall  show  the  value  of 
the  property  of  every  common  carrier  as  a  whole  and  separ- 
ately the  value  of  its  property  in  each  of  the  several  States 
and  Territories  and  the  District  of  Columbia,  classified  and 
in  detail  as  herein  required. 

"Such  investigation  shall  be  commenced  within  sixty  days 
after  the  approval  of  this  Act  and  shall  be  prosecuted  with 
diligence  and  thoroughness,  and  the  result  thereof  reported 


148  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

to  Congress  at  the  beginning  of  each  regular  session  there- 
after until  completed. 

"  Every  common  carrier  subject  to  the  provisions  of  this 
Act  shall  furnish  to  the  Commission  or  its  agents  from  time  to 
time  and  as  the  Commission  may  require  maps,  profiles, 
contracts,  reports  of  engineers,  and  any  other  documents,  rec- 
ords, and  papers,  or  copies  of  any  or  all  of  the  same,  in  aid  of 
such  investigation  and  determination  of  the  value  of  the 
property  of  said  common  carrier,  and  shall  grant  to  all  agents 
of  the  commission  free  access  to  its  right  of  way,  its  property, 
and  its  accounts,  records,  and  memoranda  whenever  and  wher- 
ever requested  by  any  such  duly  authorized  agent,  and  every 
common  carrier  is  hereby  directed  and  required  to  cooperate 
with  and  aid  the  commission  in  the  work  of  the  valuation  of  its 
property  in  such  further  particulars  and  to  such  extent  as  the 
commission  may  require  and  direct,  and  all  rules  and  regula- 
tions made  by  the  commission  for  the  purpose  of  administer- 
ing the  provisions  of  this  section  and  section  twenty  of  this 
Act  shall  have  the  full  force  and  effect  of  law.  Unless  other- 
wise ordered  by  the  commission,  with  the  reasons  therefor, 
the  records  and  data  of  the  commission  shall  be  open  to  the 
inspection  and  examination  of  the  public. 

"Upon  the  completion  of  the  valuation  herein  provided 
for  the  commission  shall  thereafter  in  like  manner  keep 
itself  informed  of  all  extensions  and  improvements  or  other 
changes  in  the  condition  and  value  of  the  property  of  all 
common  carriers,  and  shall  ascertain  the  value  thereof,  and 
shall  from  time  to  time,  revise  and  correct  its  valuations, 
showing  such  revision  and  correction  classified  and  as  a 
whole  and  separately  in  each  of  the  several  States  and  Terri- 
tories and  the  District  of  Columbia,  which  valuation?,  both 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  149 

original  and  corrected,  shall  be  tentative  valuations  and  shall 
be  reported  to  Congress  at  the  beginning  of  each  regular  ses- 
sion. 

"To  enable  the  commission  to  make  such  changes  and 
corrections  in  its  valuations  of  each  class,  of  property,  every 
common  carrier  subject  to  the  provisions  of  this  Act  shall 
make  such  reports  and  furnish  such  information  as  the 
commission  may  require. 

"Whenever  the  commission  shall  have  completed  the 
tentative  valuation  of  the  property  of  any  common  carrier, 
as  herein  directed,  and  before  such  valuation  shall  become 
final,  the  commission  shall  give  notice  by  registered  letter  to 
the  said  carrier,  the  Attorney  General  of  the  United  States, 
the  governor  of  any  State  in  which  the  property  so  valued  is 
located,  and  to  such  additional  parties  as  the  commission 
may  prescribe,  stating  the  valuation  placed  upon  the  several 
classes  of  property  of  said  carrier,  and  shall  allow  thirty  days 
in  which  to  file  a  protest  of  the  same  with  the  commission.  If 
no  protest  is  filed  within  thirty  days,  said  valuation  shall 
become  final  as  of  the  date  thereof. 

"If  notice  of  protest  is  filed  the  commission  shall  fix  a 
time  for  hearing  the  same,  and  shall  proceed  as  promptly 
as  may  be  to  hear  and  consider  any  matter  relative  and 
material  thereto  which  may  be  presented  in  support  of  any 
such  protest  so  filed  as  aforesaid.  If  after  hearing  any  pro- 
test of  such  tentative  valuation  under  the  provisions  of  this 
Act  the  commission  shall  be  of  the  opinion  that  its  valuation 
should  not  become  final,  it  shall  make  such  changes  as  may 
be  necessary,  and  shall  issue  an  order  making  such  corrected 
tentative  valuation  final  as  of  the  date  thereof.  All  final 
valuations  by  the  commission  and  the  classification  thereof 


150  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

shall  be  published  and  shall  be  prima  facie  evidence  of  the 
value  of  the  property  in  all  proceedings  under  the  Act  to 
regulate  commerce  as  of  the  date  of  the  fixing  thereof,  and 
in  all  judicial  proceedings  for  the  enforcement  of  the  Act 
approved  February  fourth,  eighteen  hundred  and  eighty- 
seven,  commonly  known  as  "the  Act  to  regulate  commerce," 
and  the  various  Acts  amendatory  thereof,  and  in  all  judicial 
proceedings  brought  to  enjoin,  set  aside,  annul,  or  suspend, 
in  whole  or  in  part,  any  order  of  the  Interstate  Commerce 
Commission. 

If  upon  the  trial  of  any  action  involving  a  final  value  fixed 
by  the  commission,  evidence  shall  be  introduced  regarding 
such  value  which  is  found  by  the  court  to  be  different  from 
that  offered  upon  the  hearing  before  the  commission,  or  addi- 
tional thereto  and  substantially  affecting  said  value,  the 
court,  beore  proceeding  to  render  judgment  shall  transmit 
a  copy  of  such  evidence  to  the  commission,  and  shall  stay 
further  proceedings  in  said  action  for  such  time  as  the  court 
shall  determine  from  the  date  of  such  transmission.  Upon 
the  receipt  of  such  evidence  the  commission  shall  consider 
the  same  and  may  fix  a  final  value  different  from  the  one 
fixed  in  the  first  instance,  and  may  alter,  modify,  amend  or 
rescind  any  order  which  it  has  made  involving  said  final 
value,  and  shall  report  its  action  thereon  to  said  court  within 
the  time  fixed  by  the  court.  If  the  commission  shall  alter, 
modify,  or  amend  its  order,  such  altered,  modified,  or 
amended  order  shall  take  the  place  of  the  original  order 
complained  of  and  judgment  shall  be  rendered  thereon  as 
though  made  by  the  commission  in  the  first  instance.  If  the 
original  order  shall  not  be  rescinded  or  changed  by  the  com- 
mission, judgment  shall  be  rendered  upon  such  original  order. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  151 

"The  provisions  of  this  section  shall  apply  to  receivers  of 
carriers  and  operating  trustees.  In  case  of  failure  or  refusal 
on  the  part  of  any  carrier,  receiver,  or  trustee  to  comply 
with  all  the  requirements  of  this  section  and  in  the  manner 
prescribed  by  the  commission  such  carrier,  receiver,  or 
trustee  shall  forfeit  to  the  United  States  the  sum  of  five 
hundred  dollars  for  each  such  offense  and  for  each  and 
every  day  of  the  continuance  of  such  offense,  such  forfeit- 
ures to  be  recoverable  in  the  same  manner  as  other  for- 
feitures provided  for  in  section  sixteen  of  the  Act  to 
regulate  commerce. 

"That  the  District  Courts  of  the  United  States  shall  have 
jurisdiction,  upon  the  application  of  the  Attorney  General 
of  the  United  States  at  the  request  of  the  commission,  alleg- 
ing a  failure  to  comply  with  or  a  violation  of  any  of  the 
provisions  of  this  section  by  any  common  carrier,  to  issue 
a  writ  or  writs  of  mandamus  commanding  such  common 
carrier  to  comply  with  the  provisions  of  this  section."  Ap- 
proved, March  1,  1913. 

If  the  Interstate  Commerce  Commission  conscientiously 
obeys  this  mandate  of  the  people  of  the  United  States  they 
will  uncover  such  a  record  of  colossal  thievery  and  extortion 
as  will  make  the  investors  in  and  the  patrons  of  our  railways 
stand  aghast. 

On  December  11,  1905,  the  author  wrote  an  open  letter 
upon  the  "Overcapitalization  of  Railroads"  afterwards 
printed  as  Senate  Document  168  of  the  59th  Congress  and 
reprinted  in  The  Finances  of  Gas  and  Electric  Light  and 
Power  Enterprises,  page  510. 

This  letter  showed  that  of  the  nearly  $12,600,000,000 
railway  securities  in  existence  in  1903  about  $7,000,000,000 


152  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

were  fictitious,  having  at  the  time  of  issue  no  more  real  value 
back  of  them  than  a  counterfeit  bank  note. 

Claims  are  now  made  that  as  many  of  our  railways  have 
utilized  a  portion  of  their  profits  to  improve  and  extend  their 
roads,  their  capitalizations  and  their  present  values  are  not 
so  widely  separated  as  at  first. 

In  some  cases  this  is  true  but  it  is  the  result  either  of  the 
extortion  of  excessive  profits  from  patrons  or  of  the  denial 
of  dividends  and  interest  to  stock  or  bondholders. 

These  robberies  are  the  inseparable  evils  resulting  from 
the  morally,  if  not  legally,  criminal  act  of  making  fictitious 
issues  of  securities. 

Counterfeiting  differs  only  from  it  in  being  a  quicker 
and  more  direct  method  of  swindling  the  public. 


CHAPTER  VI. 
PRESENT  VALUE.     STRUCTURAL  COST  OF  REPRODUCTION. 

When  the  present  value  of  the  bare  land  without  improve- 
ments is  under  consideration,  the  appraiser  should  obtain 
from  the  records  the  tax  assessment  of  each  parcel. 

This  present  tax  value  is  usually  as  high  (pro  rata  if  a 
percentage)  as  the  tax  assessors  can  venture  to  fix  it  without 
dispute. 

If  the  appraiser  is  not  personally  and  for  some  time, 
familiar  with  the  values  of  real  estate  in  the  locality  being 
considered,  he  must  be  cautious  enough  to  obtain  the  as- 
sistance of  a  committee  of  real  estate  experts  and  having  ob- 
tained their  valuation  should  check  it  from  recent  sales  of 
adjacent  properties.  The  effect  upon  its  value  of  any 
adjacent  railways,  navigable  water  fronts  and  other  trans- 
portation facilities  must  also  be  taken  into  consideration. 

The  questions  as  to  whether  the  real  estate  owned  is  re- 
quired for  the  particular  utility  under  consideration  and 
whether  it  is  used  and  useful,  should  be  answered  for  each 
parcel  and  if  not  required  in  the  near  future  its  present 
value  must  be  omitted. 

Unless  for  the  most  cogent  reasons,  the  use  of  multipliers 
of  the  value  of  adjacent  lands  to  fix  the  value  of  the  various 
parcels  of  land  used,  must  be  avoided,  for  it  has  led  to  absurd 
results  in  some  cases. 

If  the  utility  works  supplies  a  number  of  municipalities, 
each  municipality  should  be  allotted  its  pro  rata  of  the 


154  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

present  value  of  the  real  estate.  Somer's  System  of  Valua- 
tion of  R.  E.  appears  to  the  writer  to  be  the  only  logical  and 
fair  system  of  appraisement  of  land  published. 

The  courts  are  inclined  to  let  a  public  utility  share  the  ad- 
vantage of  the  usual  appreciation  of  land  with  the  growth 
of  a  community,  but  cases  do  occur  where  land  has  become 
so  much  more  valuable  for  other  pruposes,  that  it  would  be 
unfair  to  value  land  above  its  worth  for  the  purpose  of  sup- 
plying the  utility  for  which  it  is  used. 

This  is  a  debatable  principle  and  each  case  must  be  settled 
on  its  local  merits,  and  the  possibilities  of  relocation  of  the 
works. 

The  writer  has  always  been  in  doubt  as  to  whether  or  not 
the  present  value  of  land  should  be  increased  by  the  addition 
of  an  overhead  percentage  charge,  as  properly  are  the  build- 
ings and  apparatus,  but  has  usually  added  the  average  over- 
head charges  to  land  as  favoring  the  utility  company  on  a 
doubtful  point. 

Fixing  the  present  value  of  the  buildings  and  apparatus 
of  a  public  utility  is  an  exceedingly  laborious  and  intricate 
task,  but  owing  to  the  fact,  that  obtaining  from  its  books 
the  actual  cost  of  a  public  utility  is,  in  many  (I  might  say  in 
most)  cases  an  impossibility,  owing  to  its  neglect  and 
sophistication  of  its  accounts  and  also  to  the  fact  that  its 
books  are  frequently  lost  or  destroyed,  courts  now  invariably 
require  the  present  value  as  a  basis  for  their  decisions. 

The  present  value  of  the  buildings  and  apparatus  is  ob- 
tained by  subtracting  their  depreciations  from  their  struc- 
tural cost  of  reproduction  at  the  prices  of  the  date  of  an 
appraisement. 

This  structural  cost  is  obtained  by  computing  the  in- 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  155 

dividual  cost  (or  contract  price)  of  each  building  or  parcel 
of  apparatus  separately  and  then  adding  them  together  as 
classified  further  surcharging  them  with  the  proper  overhead 
charges  of  their  class. 

For  the  discovery  of  this  structural  cost  in  as  complete 
detail  as  justice  to  the  utility  demands,  requires 

FIRSTLY.  An  exhaustive  list  of  all  of  the  used  and  use- 
ful property  of  the  public  utility  as  of  the  date  of  appraise- 
ment fixed. 

SECONDLY.  Accurate  drawings  and  descriptions  of  every 
building,  structure,  or  piece  of  apparatus  now  in  existence 
as  of  the  date  of  appraisement  fixed. 

THIRDLY.  A  list  and  descriptions  of  all  of  the  public 
utility's  property  not  in  use  directly  for  the  purpose  of 
supplying  its  special  utility  together  with  a  statement  as  to 
the  reasons  for  its  ownership,  whether  for  working  stock,  for 
future  use  or  as  abandoned  property. 

If  the  utility  company  is  not  able  or  willing  to  furnish 
such  a  list  and  the  documents  and  records  supplementing  it, 
it  will  be  necessary  for  the  appraiser  to  construct  this  list 
himself. 

In  the  case  of  works  of  considerable  magnitude  the  author 
sends  his  assistant  engineers  in  pairs  to  sketch  and  measure 
each  building  and  piece  of  apparatus,  after  which  they  make 
dimensioned  working  drawings  and  compute  the  bills  of 
material  for  each  building  or  apparatus,  each  assistant  doing 
his  work  separately  and  checking  his  associate's  drawings 
and  figures. 

The  chief  engineer  should  so  arrange  as  to  be  free  to  super- 
vise and  direct  this  work  and  will  find  himself  the  busiest 
individual  of  all. 


156  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

When  these  lists  of  property  and  drawings  of  buildings 
are  completed  they  must  be  verified  and  corrected  by  a  most 
careful  personal  inspection  before  being  collated  and  classi- 
fied for  the  attaching  of  their  present  prices  and  the  com- 
putations of  the  totals  of  each  class. 

When  this  is  done  the  overhead  charges  of  each  class 
are  added  to  it  and  the  final  total  is  the  structural  cost  of 
reproduction  at  present  prices. 

From  this  structural  cost  subtract  the  depreciation  (See 
Chapter  VIII)  and  the  result  is  the  present  value. 

To  reach  a  proper  present  value  is  no  easy  task,  even  after 
the  enormous  and  intricate  detail  of  the  structural  cost  and 
of  the  depreciations  are  completed. 

In  obtaining  the  structural  cost  one  must  fix  upon  such 
times  and  order  of  construction  in  the  future  as  are  rationally 
and  practically  possible  in  which  to  construct  the  works. 

If  the  investment  in  works  amounts  as  it  frequently  does 
to  millions,  the  time  required  is  an  important  item  affecting 
as  it  does  the  interest  on  the  construction  fund. 

Some  engineers  make  the  statement  that  it  is  rarely 
possible  to  spend  more  than  $1,000,000  a  year  but  really 
such  is  not  the  case  for  the  time  required  is  principally  a 
question  o'f  delivery  of  raw  material. 

If  that  can  be  obtained  in  sufficient  quantity  it  is  rarely 
impossible  to  build  an  ordinary  public  utility  in  two  summers 
or  18  months. 

As  a  matter  of  fact  most  public  utilities  have  been  ex- 
tended piece-meal  as  their  service  requirements  increased, 
and  the  overhead  charges  have  been  mostly  covered  into 
operating  cost  as  salaries  and  appear  on  its  books  as  the 
cost  of  the  utility  sold  to  be  added  to  the  price  of  the 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  157 

utility  to  consumers  rather  than  as  charges  to  plant  con- 
struction. 

Nevertheless  it  is  always  advisable  within  reason  to  err 
in  favor  of  a  public  utility  in  the  matter  of  liberal  speculative 
allowances.  It  must  be  realized  that  as  present  value  is 
based  on  the  assumption  the  plant  is  going,  it  is  in  a  physical 
sense  its  going  value,  otherwise  the  plant  would  have  only 
a  scrap  value. 

In  considering  the  overhead  charges  we  are  obliged  by  an 
effort  of  the  imagination  to  reach  forward  into  the  future 
construction  of  a  plant  but  in  considering  depreciation  we 
must  by  a  similar  effort  of  the  mind  reach  backward  into 
the  past  of  a  public  utility. 

Long  experience  and  an  intimate  knowledge  of  the  prac- 
tical construction  and  operation  of  the  kind  of  public  utility 
considered  are  required  to  prevent  irrational  and  imprac- 
ticable assumptions  as  to  the  past  or  the  future  conditions 
controlling  it. 

As  the  truth  should  be  known  I  may  be  pardoned  for 
calling  attention  to  a  famous  example  of  the  general  ignor- 
ance of  the  practical  facts  of  a  public  utility's  construction 
and  operation,  which  occurred  in  the  case  of  Willcox  vs. 
the  Consolidated  Gas  Company  of  New  York,  Supreme 
Court,  United  States. 

The  master's  report,  though  voluminous,  blundered  at 
every  practical  point  to  which  he  referred  in  a  most  pitiable 
manner,  and  the  Supreme  Court  of  the  U.  S.  ludicrously 
assumed  in  its  decision  that  gas  in  the  street  mains  was  at  all 
points  at  very  high  and  dangerous  pressures,  although  its  de- 
cision as  to  price  was  fair,  and  as  practical  results  afterward 
proved,  entirely  correct  and  satisfactory  to  the  company. 


158  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Other  values  besides  the  controlling  present  value  should 
be  obtained  as  follows: 

If  the  records  of  a  utility  are  complete  and  reliable  the 
original  cost  to  date  should  be  obtained  to  throw  further  light 
on  its  present  value. 

If  the  whole  or  a  part  of  the  works  are  obsolete,  the  struc- 
tural cost  of  reduplication  of  an  equivalent  capacity  of  the 
present  works  may  be  of  value  to  the  court  in  finally  fixing 
the  present  value  although  in  so  doing  the  methods  of  con- 
struction and  processes  of  the  present  works  may  be  entirely 
abandoned,  for  newer  and  better  types,  and  the  locations  of 
the  works  may  also  be  changed. 

Franchise  value  (Chapter  IX)  Market  value  (Chapter  X) 
Comparative  Appraising  (Chapter  XI)  and  Going  Value 
(Chapter  XII)  should  each  be  considered  in  the  case  of  a 
public  utility  as  possibly  modifying  its  present  value  ob- 
tained or  as  presenting  it  from  a  new  point  of  view. 

Sometimes  a  public  utility  company  combines  water  and 
electricity  or  gas  and  electricity  or  water  gas,  electricity  and 
transportation  or  all  four  under  one  management. 

In  such  a  case,  the  items  of  the  plant  must  be  carefully 
segregated  in  their  structural  costs  and  present  values,  and 
treated  separately. 


CHAPTER  VII. 
OVERHEAD  CHARGES. 

The  overhead  charges  present  another  difficult  matter  for 
decision  to  the  appraising  engineer.  Fixing  overhead 
charges  requires  a  fair  minded  effort  to  prophesy  the  per- 
centages of  various  unavoidable  time  and  technical  expenses 
occurring  in  the  reproduction  of  an  existing  plant. 

Of  one  factor  only  is  the  mind  relieved ;  omissions  of  struc- 
tural details  need  not  be  considered,  for  if  the  list  or  inventory 
of  a  going  property  is  complete,  the  omissions  required  by  a 
preliminary  estimate  no  longer  exist. 

The  losses  incurred  in  the  sale  of  securities  too  should  not 
be  regarded  as  they  are  dependent  more  upon  the  solidity  of 
the  promoters  means  and  abilities  than  anything  else,  and 
need  not  occur  at  all  in  the  case  of  financially  strong  and  ex- 
perienced syndicates. 

If  the  members  of  a  promoting  syndicate  do  not  have  the 
necessary  financial  standing  and  experience  to  sell  their 
securities  at  their  real  values  or  furnish  the  cash,  the  public 
should  not  bear  their  burdens  for  them,  unless  very  cogent 
reasons  for  it  are  given. 

By  common  consent  the  interest  on  the  cost  of  the  plant 
during  its  time  of  construction  forms  part  of  the  structural 
cost  of  reproduction  of  an  existing  plant,  therefore  the  ex- 
perienced appraiser  should  carefully  estimate  the  period 
required  under  the  present  conditions  to  reproduce  the  plant 
being  appraised. 


160  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Very  few  plants  in  the  cities  of  the  United  States  appear 
to  require  more  than  two  summers  or  18  months  for  repro- 
duction and  so  at  6  per  cent  interest  the  manufacturing  plant 
starting  with  no  investment  may  usually  be  said  to  have 
lost  about  4J^  per  cent  of  its  estimated  cost  new  during 
construction. 

In  a  similar  manner  the  interest  lost  during  a  longer  or 
shorter  period  may  be  computed. 

In  the  matters  of  engineering  design  and  supervision  from 
practical  experience  the  writer  is  inclined  to  assume  about 

2  per  cent  of  the  whole  manufacturing  plant  investment  as 
fair.     Usually  architects  and  engineers  appear  to.  charge 

3  to  5  per  cent  of  the  cost  of  the  structures  required  for 
manufacturing  for  their  designs  and  supervision  but  many  of 
the  details  of  a  plant,  more  particularly  of  its  equipment  and 
land  do  not  require  the  special  services  of  an  engineer  or 
architect  and  so  as  a  fact  the  percentage  of  the  total  cost  of  a 
manufacturing  plant  is  greatly  reduced.     Practically    the 
omission  of  most  careful  studies  of  the  smallest  details  of  a 
works  is  false  economy  both  from  a    structural    and    an 
operating  point  of  view.     Nevertheless  it  is  a  fact  that  such 
omissions  occur  in  the  case  in  the  construction  of  the  works 
of  most  of  our  public  utilities. 

In  the  matter  of  taxes,  after  the  appraiser  has  fixed  upon 
the  time  of  reproduction  required  the  amount  of  the  taxes 
for  a  similar  period  can  be  found  from  the  company 's  records 
and  its  per  cent  of  the  estimated  cost  computed,  assuming  in 
that  period  as  in  the  case  of  interest  that  the  plant  begins 
with  no  investment  and  completes  the  period  of  construction 
with  its  present  estimated  value. 

For  the  usual  public  utility,  with  a  construction  period  of 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  161 

18  months,  taxes  on  the  plant  do  not  exceed  an  average  of 
2  per  cent  in  most  places. 

Royalties  and  occupation  taxes  on  the  gross  sales  or  the 
net  profits  are  really  a  part  of  the  operating  expense  of  a 
public  utility  and  as  such  are  not  included  in  the  taxes  dur- 
ing construction. 

Organization  expenses  4  per  cent  is  a  leap  in  the  dark  and  a 
most  uncertain  quantity. 

We  do  know  that  franchises  have  to  be  obtained,  that 
employes  have  to  be  paid  to  conduct  a  campaign  of  education 
of  the  public,  that  men  controlling  means  of  access  to  in- 
vestors have  to  be  paid  commissions  on  their  sales  of  stocks 
and  bonds,  that  legal  services  are  required,  and  much  money 
spent  in  office  organization,  literature,  account  books,  rent, 
etc.,  etc.,  during  a  preliminary  period  to  the  active  construc- 
tion period  and  also  during  such  period. 

No  serious  exception  appears  to  have  been  taken  to  an 
allowance  of  $40,000  for  each  $1,000,000  estimated  cost  of 
the  manufacturing  plant. 

This  makes  the  usual  aggregate  of  overhead  charges  appear 
to  be: 


Interest  during  construction  .................... 

Engineering  drawing  and  supervision  ............  2% 

Taxes  during  construction  .....................  2% 

Organization  expenses  ...........  ..............  4% 


Total  per  cent  of  estimated  cost 


If  access  can  be  had  to  reliable  records  of  the  original  cost 
of  a  public  utility  these  overhead  charges  should  be  found 
to  be  less  in  the  case  of  conservatively  managed  works. 


162  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

In  other  instances  it  would  appear  as  if  more  than  12J/2  per 
cent  had  been  spent. 

Nevertheless  some  appraisers  laying  great  stress  on  the 
present  structural  cost  of  reproduction  insist  as  a  matter  of 
consistency  on  a  probable  estimated  overhead  charge  (for 
instance  12^2  per  cent)  as  of  the  present  day  even  though, 
the  facts  being  known  to  them  from  past  records,  the  actual 
overhead  expenses  are  much  less  than  the  estimated  over- 
head charges. 

When  a  works  is  sufficiently  complete  to  operate  with  a 
portion  of  its  distribution  system  only,  then  the  piece-meal 
work  of  its  extension  begins  under  the  supervision  of  its 
regular  staff  of  employes.  The  overhead  charges  are  usually 
small  and  sufficient  margin  to  provide  a  contractors'  profit 
of  about  15  per  cent  should  be  substituted  for  the  overhead 
charge  of  say  12J^  per  cent,  on  contract  prices. 

This  15%  contractors'  profit  forms  part  of  the  cost  of 
each  structure  whether  surcharged  or  not. 


CHAPTER  VIII. 
DEPRECIATION. 

The  remedy  for  depreciation  is  repairs  but  it  is  not  its 
complete  cure,  for  although  repairs  may  be  as  thorough  as 
possible  there  always  remains  a  residual  depreciation  of 
both  buildings  and  apparatus.  Finally  the  works  come  to 
an  end  leaving  only  the  land.  The  end  of  depreciation  is 
scrap  value. 

Usually  depreciation  is  reckoned  on  the  basis  of  the 
useful  life  of  the  buildings  and  apparatus,  that  is  to  say  in  a 
physical  way  on  their  going  value  because  they  are  going, 
although  this  term  is  also  sometimes  used  in  a  financial 
sense  to  mean  the  computed  "  present  value  of  a  prospective 
income"  to  be  added  to  the  present  physical  value  of  an 
operating  plant  (see  Going  Value,  Chapter  XII),  to  obtain 
its  total  value. 

Depreciation  takes  three  forms : 

(1)  Physical  decay  or  "wear  and  tear"  requiring  renewals. 

(2)  Inadequacy  requiring  enlargements. 

(3)  Obsolescence  requiring  abandonment. 

Careful  appraisers  besides  finding  the  age  and  life  of  a 
structure  necessary  to  determine  its  physical  dec'ay  also 
modify  their  percentages  of  depreciation  by  a  personal  in- 
spection and  the  determining  of  its  condition  as  either  good , 
fair  or  bad. 

In  any  structure  its  "wear  and  tear"  is  so  largely  de- 
pendent upon  its  quality  of  material  and  workmanship  and 


164  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

the  care  given  to  it,  that  it  is  obvious,  that  its  useful  life 
is  greatly  prolonged  by  good  materials  and  good  care,  and 
that  its  depreciation  per  year  grows  less  as  its  life  grows 
longer. 

Renewals  or  repairs  less  scrap  value  are  undisputedly 
an  operating  expense  and  pass  from  this  account  directly  to 
the  operating  cost  of  the  utility  supplied 

Enlargements  involve  charging  plant  account  with  their 
cost,  and  then  crediting  this  same  account  with  the  original 
cost  of  the  inadequate  building  or  apparatus  displaced,  and 
charging  depreciation  account,  with  the  amount  of  the 
credit  to  plant  account  less  value  of  the  scrap  if  any. 

Sometimes  this  latter  amount  is  charged  directly  to 
profit  and  loss  account,  but  this  appears  to  be  a  mistake  for 
then  the  true  cost  of  supplying  the  utility  is  apparently 
reduced. 

The  cost  of  abandoned  land,  buildings  or  apparatus,  if 
obsolete,  less  their  scrap  value,  should  be  charged  to  depre- 
ciation account,  unless  these  abandoned  items  arise  from 
some  other  cause  than  obsolescence. 

Very  little  heed  appears  to  be  paid  to  the  scrap  value  of 
buildings  and  apparatus  by  experienced  appraisers  because 
they  know  that  the  cost  to  the  plant  of  removal  of  materials 
and  restoration  of  their  vacated  locality,  usually  exceeds 
scrap  value,  save  in  the  case  of  land  and  of  valuable  metals, 
such  as  copper,  lead,  etc.,  in  exceptional  cases. 

It  is  generally  the  case  that  the  present  value  of  vacated 
land  is  greater  than  its  original  cost  and  then  depreciation 
becomes  appreciation  reducing  the  operating  expenses  when 
sold. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  165 

When  abandoned  land  is  sold  at  an  advance  cash  or  other 
accounts  must  be  charged  with  its  price,  the  land  account 
credited  with  its  original  cost  and  depreciation  account 
credited  with  the  difference  between  the  sale  price  and  the 
lands  original  cost;  as  the  reverse  operation  adopted  with 
comparatively  worthless  scrap  is  considered  proper  and 
consistent. 

In  some  cases  courts  have  refused  to  allow  the  appreciation 
of  land  in  use  to  be  deducted  from  the  depreciation  of  the 
buildings  and  apparatus  in  use,  because  they  prefer  to  allow 
the  utility  company  an  equal  advantage  with  the  holders  of 
unimproved  land.  This  inconsistency  is  very  human  al- 
though irrational. 

When  a  depreciation  fund  is  established  it  should  be  in 
an  immediately  convertible  form  unless  re-invested  in  the 
works  in  extensions. 

Residual  depreciation  (remaining  after  thorough  repairs) 
should  be  charged  directly  to  operating  expense  account 
and  credited  to  depreciation  account  and  not  as  is  often 
done — charged  to  profit  and  loss  and  credited  to  plant  only . 

The  result  of  this  latter  cross  entry  is  that  no  cash  is 
shown  to  be  moved  into  depreciation  account,  but  it  still 
remains  in  bank  in  the  common  fund,  and  is  frequently  used 
for  other  purposes  than  extensions  of  plant  to  cure  the 
residual  depreciation  and  uphold  the  present  value  of  the 
plant  to  the  amount  of  its  original  cost. 

For  the  purpose  of  a  clear  record  the  depreciation  account 
must  be  credited  with  the  amount  of  residual  depreciation 
each  year  and  operating  expense  charged  with  it. 


166  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Usually  for  gas  works  and  electric  plants  this  should  be 
about  3  per  cent  and  for  water  works  1^2  per  cent  of  the 
present  value. 

Of  course  each  case  requires  study  before  final  decision. 

Whenever  new  extensions  or  new  enlargements  are  made 
the  depreciation  account  should  be  charged  with  them  and 
the  cash  account  credited  with  the  same  amount,  then  de- 
preciation account  credited  and  plant  account  charged. 

Practically  it  is  particularly  important  to  have  a  full  and 
clear  depreciation  record. 

In  the  case  of  some  companies  charging  a  depreciation  of 
large  percentage  each  year  to  profit  and  loss  and  crediting 
it  to  plant  account,  the  result  often  has  been  to  find  the  book 
value  of  the  plant  very  much  less  than  its  appraised  present 
value  because  the  repairs  have  been  very  thorough  and 
minor  extensions  were  included  in  them. 

In  some  cases  the  cash  was  divided  up  as  dividends. 

The  establishment  of  an  inaccessible  depreciation  fund 
has  been  found  to  be  impracticable  since  the  result  would 
after  a  few  years,  be  a  very  much  depreciated  plant,  and  a 
fund  at  interest  which  could  not  be  used,  to  extend  the  works 
as  required  by  a  growing  business.  Similarly  annual  al- 
lowances for  depreciation  on  the  basis  of  annuities  producing 
an  ultimate  sum  are  impracticable  because  the  residual 
depreciation  should  be  charged  to  operating  expense  each 
year  credit  being  given  to  it. 

A  diagram  will  elucidate  the  meaning  of  depreciation  or 
rather  residual  depreciation  best. 

A  piece  of  apparatus  eight  years  old  worth  $10,000  original 
cost  has  a  scrap  value  of  $500,  a  possible  life  of  twenty  years 
if  of  the  best  material  and  given  the  best  of  care. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


167 


NX 


NJ 


\ 


s 


^ 


168  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Nothing  can  impress  the  necessity  of  careful  personal 
examination  and  test  more  strongly  than  this  graphic 
presentation.  If  the  condition  is  good  we  have  a  residual 
value  of  $6,500,  fair  condition  $5,500,  bad  condition  $3,800. 

The  straight  line  is  used  for  condition  because  it  is  neces- 
sary to  cover  the  ultimate  life  of  this  $10,000  piece  of  ap- 
paratus by  an  annual  reserve,  and  also  usual  in  actual  prac- 
tice to  expend  it  at  once  for  plant  extensions  elsewhere. 

Many  pieces  of  going  machinery  show  very  little  signs 
of  wear  and  tear  during  the  early  part  of  their  life  and  later 
on  suddenly  develop  a  series  of  weaknesses  and  become 
useless. 

For  this  reason  the  usual  error  of  inspection  is  to  rate 
depreciation  too  low  and  present  value  too  high. 

Since  it  would  be  an  impossible  task  to  itemize  all  the 
probable  lives  of  buildings  and  apparatus  used  for  water, 
gas,  electricity  and  transportation;  and  in  fact  is  impossible 
save  by  a  personal  inspection  of  the  nature  of  the  material 
and  the  quality  of  workmanship  together  with  the  severity 
of  usage  and  service  required;  only  a  few  cases  where  in- 
spection is  hardly  possible  will  be  mentioned. 

Buried  cast  iron  pipes  for  gas  or  water  practically  have 
never  so  much  depreciated  as  to  be  useless,  save  for  excep- 
tional causes. 

Buried  wrought  pipes  in  clean  earth  last  from  15  to  25 
years  only  on  the  average. 

The  steel  pipes  which  latterly  have  supplanted  the  true 
wrought  iron  pipes  are  much  more  likely  to  pit. 

Various  pipe  coverings  for  wrought  iron  have  largely  in- 
creased its  life. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  169 

Electrolysis  of  buried  pipes  can  be  prevented.  Concrete 
or  terra  cotta  underground  ducts  are  imperishable. 

Foundations  for  machinery  may  be  depreciated  with  the 
machinery.  Although  the  concrete  and  cement  are  im- 
perishable their  usefulness  dies  with  the  machine  in  most 
cases. 

Buried  cast  iron,  terra  cotta  and  concrete  depreciate 
because  of  inadequacy  or  obsolescence  only. 

The  subjoined  figures  for  depreciation  of  buildings  are 
probably  the  most  authoritative  and  practical  published. 

SOMER'S   SYSTEM   OF   VALUATION   AND   DEPRECIATION   OF 
BUILDINGS. 

From  Report  to  City  of  Minneapolis,  1913. 

As  1  have  used  what  is  commonly  known  as  the  Somers' 
System  for  the  valuation  of  all  dwelling  houses  and  also  for 
the  depreciation  of  them  and  of  the  various  buildings  in  and 
around  the  gas  works  where  possible,  it  will  be  necessary  to 
explain  the  method  and  give  the  basis  upon  which  it  is 
based. 

I  first  became  practically  acquainted  with  the  Somer's 
System  in  the  year  1910  while  it  was  being  applied  to  the 
valuation  of  the  land  and  buildings  of  the  City  of  Cleveland, 
Ohio,  for  the  purpose  of  taxation  assessment.  I  was  much 
impressed  by  the  thoroughness  of  the  preparation  for  this 
work  on  a  large  scale  and  by  the  rational  and  practical 
methods  adopted  in  carrying  it  out. 

It  appeared  to  be  an  honest  attempt  to  scientifically  place 
a  correct  valuation  upon  all  of  the  prpperty  of  this  city  of 
more  than  500,000  inhabitants. 


170  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

The  method  and  results  attained  in  Cleveland  will  be 
found  in  a  pamphlet  published  by  the  Board  of  Assessors  of 
Real  Property  for  the  City  of  Cleveland,  Ohio,  1910.  This 
Board  had  five  members  and  Mr.  W.  A.  Somers  as  chief 
clerk.  It  employed  396  men  of  whom  125  were  men  of  high 
attainments  and  technical  education.  Over  145,000  parcels 
of  land  were  appraised  and  over  100,000  buildings  were 
valued  and  depreciated  during  that  year.  Notwithstanding 
the  appalling  size  of  this  task,  I  was  impressed  by  the  super- 
abundance of  precaution  and  consideration  shown  in  the 
attempt  to  make  perfectly  fair  valuations  which  valuations 
were  each  in  their  districts  submitted  to  a  large  number  of 
local  committees  and  real  estate  experts  for  their  criticism 
and  met  with  their  approval. 

It  is  the  first  city  of  the  United  States  which  has  been 
fully  and  thoroughly  valued  on  the  Somers  plan.  This 
plan  is  a  fair  and  honest  appraisal  at  one  hundred  per  cent 
of  the  value  of  each  piece  of  property  with  a  uniform  and 
regular  distribution  of  these  values  in  adjacent  localities. 
The  Somers  method  of  appraising  the  values  of  land  is  not 
required  for  our  present  purposes,  and  therefore,  is  not 
touched  upon. 

The  building  values,  however,  should  have  the  method 
of  fixing  them  given  consideration  since  upon  it  are  based 
the  values  of  such  dwelling  houses  as  the  Minneapolis  Gas 
Light  Company  possesses.  Very  properly  as  anyone  will 
discover  who  attempts  to  use  a  cubic  foot  as  a  basis,  the 
valuation  of  the  dwelling  houses  was  based  on  the  square 
foot  area  occupied  by  them  and  on  the  number  of  stories  in  height. 
The  schedules  used  in  Cleveland  were  carefully  prepared  for 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  171 

each  type  of  house  or  building  and  then  were  submitted  for 
discussion  to  engineers,  architects,  contractors  and  real 
estate  operators  and  the  figures  given  in  each  schedule 
represent  as  near  a  fair  average  price  as  the  combined  ex- 
perience of  these  referees  could  produce. 

For  dwelling  houses  the  following  schedule  was  used: 

SCHEDULE  No.  1.     SINGLE  HOUSE,  ONE  SIDE  OF  DOUBLE 
HOUSE,  ONE  OF  Row,  DUPLEX  HOUSE. 

Class  1. — Cheap  construction,  set  on  posts,  only  small 
cellar,  no  plumbing  except  kitchen  sink  and  W.  C.,  plain 
pine  finish. 

1 -story       1^-story      2-story      2^-story      3-story 

Frame 1.00  1.50  1.80  2.10  2.60 

Brick 1.20  1.70  2.00  2.30  2.80 

Class  2. — Brick  or  stone  foundation  with  full  cellar,  with 
bath  and  furnace. 

1 -story       1^-story      2-story      2}4-story      3-story 

Frame 1.60  2.10  2.40  2.70  3.20 

Brick 2.30  2.30  2.60  2.90  3.40 

Class  3. — Same  as  above  except  medium  porches  (150 
sq.  ft.),  laundry  trays,  two  one-story  bay  windows.  Plain 
pine  finish  and  plain  fixtures,  open  or  closed  plumbing. 

1 -story       1^-story      2-story        3-story 

Frame 2.20  2.70  3.00  3.90 

Brick 2.40  2.90  3.20  4.20 

Class  4. — Same  as  above  except  plain  hardwood  finish. 
Plain  electric  or  gas  fixtures;  more  than  two  one-story  bay 
windows;  large  porches;  open  plumbing;  two  baths. 


172  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

1 -story       1^-story      2-story        3-etory 

Frame 3.00  3.80  4.50  5.60 

Brick 3.20  4.00  4.80  6.00 

Class  5. — Same  as  above  except  two  or  more  baths;  orna- 
mental trimming  and  cornices;  ornamental  inside  finish  and 
fixtures;  hot  water  or  steam  heat. 

1  J/6-story      2-story        3-story 

Frame 5.30  6.30  8.00 

Brick  or  stone 6.00  7.00          10.00 

SCHEDULE  No.  2.     FLATS  FOR  FAMILIES.  TENEMENTS  AND 
APARTMENTS. 

Class  1. — Cheap  construction,  foundation  piers  or  wall  in 
trenches;  small  cellar;  no  plumbing  except  for  kitchen  and 
W.  C. 

2-story        3-story        4-story 

Frame 1.90  2.80  3.70 

Brick 2.10  3.00  3.90 

Class  2. — Brick  or  stone  foundation  with  full  basement, 
with  furnace,  bath  in  common. 

2-story        3-story        4-story 

Frame 2.40  3.20  4.00 

Brick 2.80  3.40  4.20 

Class  3. — Same  as  above  with  addition  of  bay  windows. 
Porches  or  balconies,  laundry  trays  and  private  baths. 
Plain  pine  finish;  four  one  story  bay  windows. 

2-story        3-story        4-story 

Frame 3.00  3.90  4.80 

Brick 3.20  4.20  5.30 

Class  4. — Same  as  above  except  hardwood  finish,  electric 
lights,  steam  or  hot  water  heat. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  173 

2-story        3-story        4-story 

Frame 4.50  5.60  6.60 

Brick 4.80  6.00  7.00 

Class  5. — Same  as  above  except  ornamental  outside  and 
inside  finish  and  ornamental  fixtures.  Elevators;  rein- 
forced floors  and  other  high  class  features. 

2-story        3-story        4-story        5-story 

Frame 5.50  6.60  

Brick..  5.80  7.00  9.00  12.00 


SCHEDULE  No.  4.     WAREHOUSE,  FACTORY,  MILLS,  FOUNDRY, 
GARAGE  STABLE  SHED. 

Class  1. — Cheap  construction;  pier  foundation  or  walls  in 
trenches;  small  basement;  main  floor  near  grade;  composed 
of  dirt,  flat  roof;  plain  trimmings  and  cornice;  joist  floor 
construction  without  trusses. 

1 -story        2-story        3-story        4-story        5-story 

Frame 0.60  1.20  2.00  2.80  3.50 

Brick 0.90  1.50  2.20  3.10  3.80 

Class  2. — Ordinary  construction;  brick  or  stone  founda- 
tion; full  basement;  main  floor  several  feet  above  grade; 
wood  floors;  flat  roof;  joist  floor  construction  without 
trusses;  plain  trimmings  and  cornice: 

1 -story        2-story        3-story        4-story        5-story 

Frame 1.00  1.80  2.60  3.40  4.20 

Brick 1.40  2.20  3.00  3.80  4.60 

Class  3. — Same  as  above  except  mill  construction;  wood 
trusses : 

1-story        2-story         3-story        4-story         5-story 

Frame 2.00  2.90  3.80  4.70  5.60 

Brick 2.40  3.30  4.20  5.10  6.00 


174  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Class  4. — Modern  fireproof  manufacturing  building;  steel 
frame;  one  elevator:  flat  roof.  Rate  per  sq.  ft. 

1 -story        2-story        3-story        4-story        5-story 
2.70  3.80  4.90  6.00  7.60 

6-story        7-story        8-story        9-story        10-story 
9.00  10.40  11.80  13.20  14.60 

There  are  altogether  five  schedules  of  different  types  of 
building  each  with  four  different  classes,  dependent  upon  the 
quality  of  material  and  workmanship  used  in  their  con- 
struction, making  altogether  about  nineteen  classes  more  or 
less  which  appeared  sufficient  to  cover  the  average  types  of 
structures  in  Cleveland.  As  these  various  buildings  were  of 
different  ages  and  according  to  the  thoroughness  and  com- 
pleteness of  their  repairs  as  judged  by  an  inspection  in  dif- 
ferent conditions,  it  was  necessary  to  depreciate  them  ac- 
cording to  the  subjoined  table. 

SOMER'S  SYSTEM,  CLEVELAND,  OHIO,  1910. 
TABLE  FOR  THE  DEPRECIATION  OF  BUILDINGS. 

Store  Buildings  and  Dwellings. 

Brick  Fiame 

Per  Cent  Depreciation  Per  Cent  Depreciation 

Years  Good    Fair     Bad  Years  Good    Fair  Bad 

1236  1           3          4  10 

2  4           5         11  2           6           7  17 

3  6          8         15  3           8         10  23 

4  8         10         18  4         10         12  27 

5  10  12  21  5  13  15  31 

6  12  13  24  6  15  17  34 

7  13  15  27  7  17  19  37 

8  14  17  29  8  18  21  40 

9  16  18  32  9  20  23  42 

10  17  20  34  10  22  25  45 

11  18  21  36  11  23  26  47 

12  19  22  38  12  25  28  49 

13  20  23  40  13  26  30  51 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  175 

Brick  Frame 

Per  Cent  Depreciation  Per  Cent  Depreciation 

Years  Good  Fair  Bad  Years  Good  Fair  Bad 

14  21    24  41  14    28    31  53 

15  22    25  43  15    29    32  55 

16  23    26  45  16    30    34  57 

17  24    27  46  17    31    35  58 

18  25    28  47  18    32    36  60 

19  25    29  49  19    33    37  61 

20  26    30  50  20    34    38  63 

21  26    30  51  21    34    39  65 

22  27    31  53  22    35    40  66 

23  27    32  54  23    36    41  68 

24  28    32  55  24    37    42  69 

25  28    33  56  25    37    43  71 

26  29    34  57  26    38    44  72 

27  29    34  57  27    39    45  74 

28  30    35  58  28    39    46  75 

29  30    35  59  29    40    47  77 

30  31    36  60  30    40    47  79 

31  31    36  61  31    41    48  80 

32  32    37  61  32    42    49  82 

33  32    37  62  33    42    50  83 

34  33    38  63  34    43    51  85 

35  33    38  64  35    43    52  86 

36  33    39  65  36    44    53  88 

37  34    40  65  37    45    53  90 

38  34    40  66  38    45    54  91 

39  34    41  67  39    46    55  93 

40  35    41  68  40    46    56  95 

41  36    42  68  41    47    57 

42  36    42  69  42    47    58 

43  37    43  70  43    48    59 

44  37    43  71  44    48    59 

45  38    44  72  45    49    60 

46  38    44  72  46    50    61 

47  39    45  73  47    50    61 

48  39    46  74  48    51    63 

49  40    46  75  49    51    64 

50  40    47  75  50    52    64 

In  the  above  table  it  is  obvious  that  depreciation  is,  after 

all,  largely  a  matter  of  personal  judgment.  Thus,  for  a  brick 
building  fifty  years  old,  the  depreciation  ranges  all  the  way 
from  forty  to  seventy-five  per  cent  of  it  structural  cost. 


176  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

On  the  continent  of  Europe,  houses  and  factories  and  other 
buildings  hundreds  of  years  old  are  very  common,  but  on 
this  side  of  the  Atlantic  fifty  years  appears  to  be  consid- 
ered the  maximum  life  of  dwellings  and  of  factory  buildings 
in  almost  all  cases. 

Regarding  Somer  's  System,  I  would  say  that  it  has  proved 
a  great  success  in  Cleveland,  Ohio,  and  subjoin  a  letter  from 
his  Honor,  Mayor  Newton  D.  Baker,  regarding  the  great 
satisfaction  with  which  it  is  used. 

Office  of  the  Mayor 

CLEVELAND,  June  7,  1912. 
PROF.  WM.  D.  MARKS, 
Omaha,  Nebraska. 
My  dear  Prof.  Marks: 

I  received  your  letter  of  June  5th,  and  since  what  you  ask 
is  rather  a  resum6  of  the  state  of  public  sentiment  on  the 
subject  of  the  Somer 's  system  than  any  detailed  comment 
upon  the  rate  of  taxes  here  last  year,  I  can  perhaps  myself 
answer  your  letter  as  well  as  through  another.  In  short  it 
is  quite  within  bounds  to  say  that  the  Somer 's  system  of  real 
estate  valuation  in  Cleveland  has  worked  admirably,  and 
I  do  not  think  I  have  heard  a  single  suggestion  against  the 
system.  It  is  universally  accepted  here  as  an  enormous 
advance  over  the  previous  method  which  was  haphazard, 
unscientific  and  extremely  unequal.  It  may  well  be  that 
some  other  system  might  be  devised  which  would  either  be 
as  scientific  or  more  so,  but  up  to  this  moment  I  know  of  no 
other  system  comparable  to  the  one  we  used. 
Cordially  yours, 

(Signed)     NEWTON  D.  BAKER. 

It  should  be  understood  in  advance  that  in  appraisement 
it  is  as  impossible  as  it  would  be  insincere,  to  claim  any 
excessive  degree  of  accuracy. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  177 

Although  long  experience  as  a  specialist  will  enable  an 
appraiser  to  obtian  the  substantial  truth  in  the  aggregate 
of  large  gas  works  or  other  works  in  which  the  appraiser  has 
used  experienced  judgment  in  their  depreciation  and  has 
laboriously  gone  into  all  details,  still  the  above  table  of 
depreciation  shows  the  wide  margin  of  personal  difference 
of  opinion  which  may  exist  between  perfectly  sincere  engi- 
neers trying  to  impartially  state  the  truth. 

Somer's  System  is  particularly  valuable  as  presenting 
these  wide  margins  of  valuation  and  of  depreciation  as  the 
well  considered  and  clearly  and  publicly  stated  opinion  of  a 
large  body  of  specially  qualified  appraisers  of  property. 

The  average  depreciation  of  the  Minneapolis  Gas  Light 
Company's  works  of  20.7  per  cent  covers  buildings  and 
machinery  and  does  not  appear  excessive  but  rather  too  small 
if  in  error. 


CHAPTER  IX. 
COMPARATIVE  APPRAISING. 

Comparative  methods  may  be  used  for  rough  sketchy 
approximations  by  an  experienced  appraiser  with  close 
results  to  accuracy. 

The  engineer  in  charge  of  a  score  or  more  assistants  in  a 
large  appraisement  will  find  it  humanly  impossible  to  repeat 
and  check  the  work  of  all  in  detail  still  he  must  let  no  final 
results  pass  unchecked. 

The  characteristics  of  the  various  buildings  required  by  a 
public  utility  are  marked.  They  are  mostly  mere  shells  with 
one  or  more  floors  lighted  by  windows  and  doors  and  gen- 
erally devoid  of  ornament,  but  roofed  in  an  expensive  manner. 

For  this  reason  after  a  prolonged  experience  in  the  detailed 
cost  computations  of  their  elements,  it  is  easy  for  an  engi- 
neer to  construct  a  table  of  their  approximate  costs  per 
square  foot  per  story  for  comparative  estimates  and  for 
roughly  checking  the  future  detailed  computations  of  other 
works  which  should  always  be  made  for  each  works  appraised, 
regardless  of  precedents. 

If  the  resuft  of  the  paired  assistants'  detailed  computa- 
tions of  the  value  of  each  building  does  not  agree  closely 
with  the  average  per  square  foot  of  similar  buildings,  there 
should  be  a  careful  review  of  these  computations  in  detail 
and  if  found  correct  the  cause  of  the  variations  noted. 

So  too  with  the  apparatus.  There  is  a  generally  correct 
average  cost  per  H.P.  for  boilers  of  each  type. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  179 

Each  K.W.  capacity  of  each  type  electrical  machinery  has 
an  average  price. 

Each  type  of  steam  engine  has  an  average  cost  per  H.P. 

Each  cu.  ft.  of  capacity  of  a  gas  holder  of  a  certain  capacity 
has  its  average  cost. 

Each  lineal  foot  of  buried  cast  iron  street  main  has  its 
average  price  for  each  diameter  and  weight. 

So  too  with  wrought  iron  and  terra  cotta  piping  buried  in 
the  streets. 

Patented  machinery  or  machinery  monopolized  by  a  single 
factory,  cannot  be  so  closely  figured  and  prices  must  be 
obtained  from  the  makers. 

Finally  each  size  of  gas  works  has  its  average  cost  per 
1,000  cu.  ft.  capacity  or  of  annual  sales. 

Each  electric  works  has  its  average  cost  per  K.W.  of 
capacity,  installed. 

Each  electric  or  steam  railway  has  an  average  cost  per 
mile  of  single  track. 

When  these  costs  are  finally  deduced  they  must  be  com- 
pared with  similar  works  serving  like  populations  under 
similar  conditions,  and  if  a  marked  difference  is  observed 
the  cause  of  it  be  found.  Nothing  is  more  misleading  than 
improperly  chosen  precedents. 

Water  works  do  not  so  readily  yield  consistent  rough 
averages  for  comparison  of  type  with  type,  on  the  basis  of 
capacity. 

Many  of  these  capacity  values  or  costs  of  public  utilities 
are  given  in  The  Finances  of  Gas  and  Electric  Light  and 
Power  Enterprises  and  also  in  this  work  in  Chapter  XVIII, 
Capitalization  Assets  and  Profits  of  Massachusetts  Gas 
Companies. 


180  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

In  Chapter  VIII,  from  Somer's  System  of  Valuation  is 
quoted  the  costs  per  square  foot  so  far  as  they  refer  to 
buildings  required  by  public  utilities. 


CHAPTER  X. 
MARKET  VALUE.     ENGLISH  GOING  VALUE. 

The  market  value  of  the  securities  of  a  public  utility 
is  affected  (as  an  investment)  by  many  and  often  obscure 
factors. 

The  controlling  factor  always  is  the  population  and  its 
commercial  and  manufacturing  activity  together  with  the 
future  prospects  of  the  community  served. 

Next  to  this  in  the  enhancement  of  value  comes  such  a 
management  of  a  utility  as  gives  confidence  in  its  profitable 
operation. 

A  loosely  drawn  franchise  giving  exclusive  occupation, 
and  sometimes  making  no  provision  for  the  fixing  of  fair  and 
reasonable  rates,  is  reckoned  of  very  great  value  to  enter- 
prising promoters. 

For  each  locality  and  utility  there  are  usually  individual 
factors  affecting  the  market  prices  of  its  utilities,  and  these 
may  be  peculiar  to  each  locality  and  occur  nowhere  else. 

In  fixing  the  market  value  of  a  utility  '&  stocks  the  utmost 
caution  and  most  thorough  investigation  is  required. 

If,  however,  we  have  the  present  value  of  a  utility  plant 
from  reliable  appraisement,  and  from  the  operating  expenses 
record  have  obtained  the  utility's  net  annual  earnings,  the 
rate  of  interest  or  dividend  ruling  as  acceptable  in  this 
proposition  will  fix  the  market  value  of  it. 

If  for  instance  6  per  cent  is  satisfactory  to  an  intending 
purchaser  of  a  plant  appraised  at  $1,000,000  present  value 


182  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

whose  net  earnings  are  $90,000  per  year  with  a  prospect  of 
remaining  the  same  or  increasing;  its  market  value  results 
from  the  capitalization  of  $90,000  at  6  per  cent  which  is 
$1,500,000. 

The  premium  of  $500,000  which  a  willing  purchaser  pays 
beyond  the  present  value  of  the  plant  is  sometimes  in 
England  called  a  part  of  its  " going  value"  and  it  is  the  pres- 
ent value  of  a  prospective  income  of  $30,000  at  6  per  cent 
from  a  plant  earning  9  per  cent  of  $1,000,000  present  value. 

In  England  the  market  value  of  the  stocks  of  utilities 
about  to  be  municipalized  has  been  determined  as  follows 
in  an  endeavor  to  reflect  and  embody  public  opinion  as  to 
the  present  market  value  of  the  investment. 

The  average  sale  price  of  the  shares  of  the  utility  is  com- 
puted from  a  series  of  yearly  market  records. 

The  average  dividend  is  likewise  computed. 

Dividing  the  average  dividend  by  the  average  price  of 
shares  gives  the  interest  on  the  investment  found  satis- 
factory to  investors. 

The  net  earnings  of  this  utility  are  likewise  averaged  for 
a  series  of  years,  and  shown  to  be  maintainable. 

These  net  earnings  are  then  capitalized  at  the  per  cent 
profit  on  its  stock  found  acceptable  to  the  investing  pub- 
lic, and  this  results  in  the  market  value  of  the  utility  to  be 
paid  by  the  municipality.  It  is  the  English  going  value. 

This  method  of  attempting  to  learn  and  to  execute  the 
common  opinion  of  the  investing  public  as  to  values  of  stock 
and  rates  of  interest  pre-supposes  that  the  rates  for  the 
utility  are  and  will  continue  to  be  satisfactory  to  the  public, 
and  further  that  the  stock  sales  were  bona-fide  sales  to 
investors  for  income. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  183 

No  appraisement  is  required  for  market  values  under  this 
method  so  where  rates  for  the  utility  are  often  subject  to 
change  and  securities  are  issued  without  checks  of  any  kind 
as  has  so  frequently  been  the  case  here,  market  value  may 
not  be  safely  used  to  fix  values  of  plants.  It  may,  however, 
reflect  the  public  opinion  of  investors. 

Bonds,  preferred  stocks,  debentures,  all  are  frequently 
issued  by  and  take  precedence  of  the  common  stock  of 
public  utilities. 

In  such  cases  the  interest  on  the  preference  securities 
must  be  subtracted  from  the  net  earnings  before  the  value 
of  the  common  stock  can  be  computed  from  its  dividend, 
if  one  should  desire  to  compute  market  value  as  a  check 
upon  other  values* 


CHAPTER  XI. 
FRANCHISE  VALUE. 

Franchise  value  really  belongs  to  the  community  which 
grants  it. 

A  franchise  conveys  to  a  public  utility  an  easement  or  a 
right  of  way  for  its  apparatus  without  trespass. 

It  also  is  a  permit  to  do  business  in  a  community,  and 
as  most  public  utilities  are  natural  monopolies,  a  franchise 
usually  is  a  virtual  monopoly. 

These  privileges  are  often  very  valuable,  but  as  it  is  usual 
for  a  community  to  grant  a  franchise  without  direct  pay- 
ment for  it,  it  is  also  usual  and  consistent  not  to  reckon 
franchise  value  in  appraising  works  for  rate  making  pur- 


Certain  relatively  small  expenses  for  obtaining  the  right 
of  way  and  for  placing  apparatus  in  streets  and  commons 
are  incurred  and  are  included  in  the  physical  present  value 
of  the  plant  without  reference  to  the  franchise. 

It  might  be  proper  to  issue  to  a  community  granting  a 
franchise  a  certain  proportion  (say  one-half)  of  the  public 
utility's  securities  whenever  issued  in  return  for  this  in- 
tangible franchise  value  and  then  in  the  form  of  dividends 
and  interest,  the  whole  people  would  receive  pay  for  the 
privilege  granted  and  have  an  active  part  in  its  management. 

Some  cities  demand  a  royalty  or  occupation  tax  of  public 
utilities  based  on  its  gross  earnings  or  its  sales  measured  in 
quantity,  but  as  the  utility  at  once  adds  this  to  the  cost  of 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  185 

operation  (and  the  price)  it  becomes  a  special  tax  on  its 
consumers,  it  does  not  appear  as  just  as  the  previous  sug- 
gestion, of  a  share  in  the  capitalization. 

In  the  writer's  opinion  as  affecting  rates  a  legislative 
body  granting  a  franchise  should  provide  a  time  limit,  a 
purchase  clause  by  which  the  municipality  can  at  any  time 
purchase  the  utility  for  a  relatively  inconsiderable  cash 
payment,  together  with  bonds  secured  by  the  property  of 
the  utility  only,  running  for  specified  terms  and  allowing 
amortization  from  its  profits. 

The  franchise  should  specially  provide  that  the  price  of 
the  utility  should  be  its  present  value  of  the  time  of  transfer 
free  from  any  additions  for  cost  of  development  of  income, 
good  will,  franchise  value,  going  value,  or  any  form  of  in- 
tangible value. 

Likewise  in  the  matter  of  rates  there  should  be  a  pro- 
vision for  their  review  and  re-determination  by  the  munici- 
pality itself  at  regular  and  short  intervals  during  the  term 
of  the  franchise  on  the  basis  of  present  physical  value  since 
its  citizens  are  best  informed  as  to  local  conditions  and  local 
costs  and  directly  feel  the  burden  of  its  utility  prices,  and 
this  rate  determination  should  be  a  municipal  matter  exclu- 
sively. Public  Service  Commissions  in  some  notable  in- 
stances have  recently  failed  to  protect  consumers  from  ex- 
tortion for  reasons  which  they  alone  know,  and  do  not  give. 

In  the  matter  of  the  issues  of  new  securities  by  a  public 
utility,  it  should  not  be  allowed  until  after  a  public  hearing 
and  a  thorough  and  exact  estimate  itemizing  the  cost  of 
proposed  extensions  or  enlargements.  These  securities 
should  be  publicly  auctioned. 


186  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

It  is  money  well  spent  to  require  the  annual  publication 
by  a  utility  in  one  or  more  daily  papers  of  all  of  its  oper- 
ating expenses  in  the  most  minute  detail  as  carefully  pre- 
scribed in  the  franchise  ordinance,  for  there  always  are  able 
and  public  spirited  citizens  ready  to  point  out  possible  im- 
provements and  economies  of  management,  if  the  manage- 
ment is  not  good. 

Publicity  to  all  is  the  best  safeguard  possible. 

If  a  legislative  body  granting  a  franchise  will  feel  it  to  be 
its  duty  to  guard  its  citizens  from  extortion  and  its  public 
utility  from  loss  or  mismanagement  by  these  precautionary 
clauses  in  its  franchise  ordinance,  there  should  be  little 
difficulty  in  cities  purchasing  public  utilities  at  a  fair  price 
under  easy  conditions,  or  in  lieu  thereof  establishing  fair 
and  reasonable  rates  upon  a  judicially  fair  appraisement. 

The  two  gas  ordinances  of  Minneapolis  1910  containing 
most  of  the  provisions  stated  above  which  were  carefully 
drafted  as  to  technical  and  commercial  details  by  the  writer, 
thoroughly  criticized  and  amended  on  local  points  by  the 
Gas  Committee  of  the  City  Councils,  and  finally  put  into 
legal  form  by  their  counsel,  have  greatly  benefitted  that 
city  and  are  often  quoted  as  model  ordinances,  fair  alike 
to  the  utility  and  its  consumers. 

These  ordinances  are  an  excellent  example  of  home  rule 
in  municipalities  and  of  its  practical  good  results. 

As  a  matter  of  equity  a  franchise  which  is  a  gift  of  the 
people  is  not  usually  valued,  but  as  a  matter  of  fact  its  pro- 
tection of  extortion  in  an  exclusive  business  or  of  the  profits  of 
a  well  conducted  utility  has  frequently  proved  it  of  an  immense 
value  which  it  would  be  hard  to  overestimate. 


CHAPTER  XII. 

PRESENT  VALUE  OF  PROSPECTIVE  PROFITS;  "GOOD  WILL"; 

"DEVELOPMENT  EXPENSE";  "GOING  VALUE"; 

"INTANGIBLE  VALUES";  OPTIONS. 

In  England  from  which  country  we  can  obtain  both  fair 
and  rational  and  practical  precedents,  it  is  often  the  custom 
in  appraising  the  good  will  of  a  competitive  works  to  value 
it  at  three  years  net  profits  as  near  as  they  can  be  figured 
from  its  past  and  the  future  growth,  for  the  very  simple 
reason  that  it  is  estimated  that  it  will  require  that  time 
under  like  conditions  to  reach  an  equal  annual  profit,  if  a 
new  concern  is  started  like  it. 

In  the  case  of  natural  monopolies  such  as  public  utilities 
it  is  customary  to  add  10  per  cent  to  the  present  value  of 
reproduction  less  depreciation  or  to  the  market  value,  to 
cover  all  intangible  values,  when  they  are  valued  for  pur- 
chase by  a  municipality. 

The  writer  does  not  know  that  either  of  these  customs 
are  defined  in  the  written  laws  of  that  country,  but  in 
Canada  we  find  the  latter  crystallized  out  in  the  following 
law. 

Municipal  Acts  of  Ontario  3  Ed.  VII  Chapter  19  Section 
566  Sub.  Sec.  4  Clause  (a  2). 

"In  any  arbitration  under  clause  (a)  hereof  to  determine 
the  price  to  be  paid  for  the  works  and  property  of  a  gas  or 
water  company,  the  arbitrators  shall  determine  the  actual 
value  of  such  works  and  property  having  regard  to  what  the 


188  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

same  would  cost  if  the  works  should  be  then  constructed  or 
the  property  then  bought,  making  a  due  allowance  for  de- 
terioration and  wear  and  tear  and  making  all  other  proper 
allowances,  but  not  allowing  anything  for  prospective  profits 
or  franchise  and  shall  increase  the  amount  so  ascertained  by 
10  per  cent  thereof,  and  such  increased  amount  shall  be  the 
amount  which  the  arbitrator  or  arbitrators  shall  award  as 
the  price  to  be  allowed  for  the  said  works  and  property." 

This  is  a  decided  reduction  of  the  proportion  of  prospective 
profits  for  a  natural  monopoly  as  compared  with  a  com- 
petitive going  concern. 

Of  course  good  will  cannot  be  said  to  exist  as  a  valued 
feature  of  a  virtual  monopoly. 

That  part  of  the  development  expense  of  the  business  of 
a  public  utility,  which  has  exceeded  a  fair  return  upon  the 
investment,  and  has  not  been  recouped  or  more  than  re- 
couped by  profits  in  later  years,  justly  should  be  included 
in  an  appraisement  of  it. 

The  practical  difficulty  in  awarding  development  expense 
is  the  fact  that  in  most  public  utility's  books  there  is  no 
intelligible  record,  or  segregation  of  it,  even  though  the 
records  do  exist,  which  is  rarely  the  case. 

The  Wisconsin  Railroad  Commission,  (Payne  vs.  Wisconsin 
Telephone  Company)  with  characteristic  thoughtlessness 
says,' 'Every  effort  honestly  put  forth,  every  dollar  properly 
expended,  and  every  obligation  legitimately  incurred,  in  the 
establishment  of  a  public  utility  business,  must  be  taken 
into  consideration  in  the  making  of  rates  for  such  business. 
Collectively  the  elements  just  referred  to  may  be  designated 
by  the  term  going  value." 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  189 

But  this  is  precisely  what  the  gentlemen  who  originated 
the  term  going  value  and  developed  the  method  of  com- 
puting it  say  it  is  not. 

What  the  Wisconsin  Railroad  Commission  statement 
really  means  is  development  expense,  incurred  in  the  past, 
and  what  " going  value"  means,  as  a  matter  of  common 
consent  among  its  originators,  is  the  present  value  of  a 
prospective  income. 

This  theory  of  going  value,  in  the  face  of  the  ever  growing 
rate  regulation  of  public  utilities,  appears  to  be  a  speculative 
risk  in  futures  and  a  computation  of  a  prospective  income 
based  on  many  arbitrary  assumptions,  which  must  be  made 
by  a  very  fallible  computer  whose  point  of  view  often  pre- 
vents him  from  seeing  but  one  side  of  a  case,  and  whose 
chain  of  logic  has  many  missing  links. 

No  amount  of  skill  and  ingenuity  displayed  in  computing 
going  values,  could  persuade  a  seasoned  capitalist  to  invest 
in  public  utilities  unless  their  market  values  confirmed  the 
computers  results  and  a  continuance  of  rates  upon  which  it 
was  based  was  apparently  assured. 

As  defined  by  its  advocates  "going  value"  is  "the  value 
of  a  created  income  or  to  put  it  in  the  language  of  the  theory 
of  reproduction,  it  is  the  cost  of  reproducing  a  given  income." 

In  its  final  analysis  they  compute  it  as  the  present  value 
of  a  difference  of  prospective  profits,  or  losses. 

The  basis  of  "going  value"  upon  which  they  rear  their 
elaborate  structure  of  arbitrary  assumption  and  plausible 
prophesy  is  the  competitive  disadvantages  under  which  a 
municipality  labors,  if  it  has  no  option  of  purchase,  and  de- 


190  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

cides  not  to  purchase  the  utility  but  to  build  another  works 
of  equal  capacity  and  value. 

If  the  municipality  builds  it  will  be  obliged  to  : 

First. — Invest  the  money  required  and  lose  the  profits  of 
the  construction  time  required  by  the  plant. 

Second. — When  the  structure  is  complete  and  business 
begins  it  will  pay  the  money  and  spend  the  time  required 
to  reach  an  equal  gross  income  to  that  of  the  going  concern. 

(An  option  for  the  purpose  of  avoiding  these  disad- 
vantages obviates  them  and  " going  value"  need  not  be 
considered  for  only  the  past  development  expense  is  re- 
quired.) 

Of  options  Mr.  J.  W.  Alvord  says,  "The  city  has  by  con- 
tractual relations  acquired  the  right  to  become  possessed 
of  the  particular  plant  in  question.  Under  these  circum- 
stances it  must  be  conceded  that  it  does  not  have  to  face  the 
possibility  of  building  a  duplicate  or  rival  plant,  that  by  its 
contractual  relations  it  has  acquired  the  right  at  once  to  step 
into  the  possession  of  the  plant  and  its  revenues."  (See 
Proc.  American  Water  Works  Assn.,  June,  1909.) 

The  value  of  the  option  appears  to  equal  the  "going  value  " 
in  its  entirety  if  his  method  of  reasoning  is  carried  to  its 
logical  conclusion. 

The  question  of  the  fairness  of  the  existing  rates  and 
whether  the  goihg  concern  is  profitable  or  not,  does  not 
concern  some  of  the  advocates  of  "going  value"  for  they  say 
getting  business  and  income  costs  money  in  all  cases. 

Graphic  methods  and  the  use  of  diagrams  appear  to  be  the 
favored  method  of  its  advocates  of  showing  going  value, 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  191 

but  for  the  purpose  of  showing  " going  value"  to  be  the 
present  value  of  prospective  annual  differences  in  profits 
or  losses  we  will  take  the  case  of  the  Dubuque  Water 
Works  as  an  example. 

FROM  REPORT  OF  BEN  EZETTE  WILLIAMS 
DUBUQUE  APPRAISEMENT,  APRIL,  1899. 

"In  making  this  estimate  additional  factors  are  used  as 
follows : 

The  total  time  from  the  date  of  purchase  September  1, 1899 
to  March  1, 1908  is  8J/2  years,  two  years  of  which  are  used  in 
construction.  Money  is  considered  to  be  worth  5  per  cent 
on  water  works  investments.  Hydrant  rental  for  1899  of 
$17,000  is  assumed  to  continue  through  the  years  of  con- 
struction 1900  and  1901.  The  operating  expenses  for  old 
works  during  those  two  years  is  taken  at  $22,000  for  each 
year.  It  is  considered  that  on  September  1,  1901  new  works 
would  start  with  no  earnings  and  that  in  6j/£  years  ending 
with  March  1,  1908  they  would  have  earnings  at  the  rate  of 
$54,000  per  annum  from  domestic  service. 

It  is  also  considered  that  during  this  period  the  expense 
of  maintenance  which  includes  operating  expense  and  interest 
would  be  equal  for  reasons  herein  before  stated.  It  is  also 
considered  that  during  the  period  of  construction  there 
would  be  a  gain  of  one  year's  interest  by  the  new  works  or 
say  5  per  cent  on  $500,000.  A  tabulation  of  the  estimate 
which  follows  shows  a  total  going  value  of  $147,218  and  is 
assumed  to  be  correct  in  the  determination  made  by  us  in 
this  case." 


192 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 


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PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  193 

This  elaborated  estimate  gives  in  Column  (12)  the  same 
results  as  in  the  previous  estimate  Column  (9)  and  calls 
attention  to  the  fact  that  "  annual  going  value"  is  only  a 
new  name  for  the  difference  in  annual  prospective  profits 
or  losses  as  estimated  under  the  assumptions  of  the  com- 
puter. The  correctness  of  these  assumptions  or  amounts  is 
of  no  present  importance  as  the  only  object  in  the  present 
case  is  to  lucidly  show  the  meaning  of  "going  value"  as 
computed  and  accepted  in  Dubuque  "going  value"  is  the 
present  total  of  a  prospective  estimated  difference  in  annual 
profits,  or  losses  of  two  works  as  estimated  under  the  condi- 
tions assumed. 

Assuming  that  there  is  no  option  doing  away  with  the 
possibility  of  a  construction  period  and  its  required  fixed 
investment  besides  another  period  required  for  the  de- 
velopment of  business  with  its  required  expense  and  that  a 
public  utility  is  to  be  appraised  and  purchased  by  negotia- 
tion or  under  condemnation  proceedings  what  weight  should 
a  conscientious  appraiser  give  to  "  going  value?" 

In  fact  is  not  the  " going  value"  of  the  future  the  present 
value  of  prospective  differences  in  future  profits  or  losses 
obtainable  only  (if  the  premises  are  correct)  under  the  pro- 
tection of  a  virtually  exclusive  franchise?  Is  it  not  fran- 
chise value?  Would  not  its  intangible  prospective  excess 
of  profits  as  well  as  its  equally  intangible  franchise  value 
vanish  together  leaving  the  present  physical  part  of  a  utility 
plant  open  to  ruinous  competition?  Such  appears  to  have 
regularly  been  the  case  when  competing  plants  have  been 
built. 


194  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

Is  not  an  option  to  purchase  a  plant  intended  to  be  a 
means  of  terminating  its  franchise  without  interfering  with 
its  physical  operation? 

The  protection  of  the  prospective  profits  of  a  public 
utility  (its  going  value)  appears  to  be  wholly  dependent 
upon  the  virtual  exclusiveness  of  a  continued  franchise. 

It  is  a  well  established  principle  of  equity  that  franchise 
value  is  not  to  be  charged  against  its  donors,  the  people. 
Should  going  value  be? 

No  concern  is  of  any  ultimate  value  to  a  community  unless 
it  makes  a  profit.  Substantial  justice  and  substantial  profit 
are  due  a  utility  for  the  risk  they  have  assumed  in  fur- 
nishing what  the  community  should  have  itself  furnished. 

Nor  should  this  profit  be  based  on  the  safety  rates  of  an 
investment  in  government  securities  or  sound  mortgages. 

Like  the  values  of  land,  the  per  cent  of  net  profit  allowed 
to  a  public  utility  should  be  locally  fixed  by  experienced  local 
business  men.  If  money  can  be  shown  to  have  been  ex- 
pended in  development  expense;  without  question,  if  wisely 
spent  and  not  recouped  in  extra  profits,  it  should  be  included 
in  a  valuation  and  recognized  as  fixed  capital  or  otherwise 
provided  for  in  the  rates  for  the  utility  furnished. 

If  there  are  no  intelligible  records  of  development  expense 
as  is  too  frequently,  the  case,  the  use  of  the  method  de- 
veloped so  ably  and  ingeniously  and  called  "going  value" 
on  the  basis  of  rational  and  practical  assumptions  with  fair 
and  reasonable  rates  may  prove  of  great  assistance  in  sug- 
gesting a  sum  fairly  allowable  to  prosperous  companies  for 
present  development  expenses,  just  as  present  value  serves 
us  in  the  absence  of  complete  records  enabling  us  to  fix  the 
original  cost  of  a  utility. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  195 

Possibly  the  English  law  makers  in  adding  10  per  cent  to 
the  present  value  of  a  utility  plant,  for  all  intangible  values 
intended  to  cut  a  Gordian  knot  which  they  assumed  could 
not  be  untied,  by  any  one. 


CHAPTER  XIII. 

BOOKS  AND  ACCOUNTS;    OPERATING  EXPENSES 
AND  INCOME. 

Many  admirable  systems  of  keeping  the  account  books 
of  public  utilities  have  been  devised  and  printed  by  pro- 
fessional accountants,  but  the  utilities  most  likely  to  require 
investigation  rarely  use  any  of  them,  and  so  the  rate  maker 
may  find  himself  obliged  to  rewrite  the  books  from  vouchers 
and  check  stubs  and  bank  deposit  books  in  order  to  prop- 
erly apportion  the  various  items  of  expense  and  income. 

The  classification  of  these  items  too,  requires  a  practical 
familiarity  with  the  manufacturing  or  operating  methods 
and  costs  of  the  utility  under  consideration,  so  that  an  ac- 
curately correct  set  of  account  books  may  require  careful 
segregation  of  accounts  in  a  form  differing  from  the  existing 
form  used. 

Thus,  for  rates,  the  income  must  not  be  from  other  sources 
than  operation  and  if  in  its  operation  the  concern  supplies 
different  classes  of  users  the  income  from  each  class  must  be 
segregated. 

In  cases  of  importance  this  examination  is  usually  for  a 
period  of  five  years  preceding  the  action. 

The  segregation  of  the  operating  expenses  is  a  more  diffi- 
cult problem. 

In  cases  requiring  great  accuracy  a  period  of  five  years 
is  usually  taken  as  covering  the  cycle  of  greater  and  lesser 
repairs  and  depreciations  occurring  in  most  public  utilities 
and  giving  a  fairer  average  than  one  year. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  197 

Incidentally  one  can  learn  the  custom  of  the  corporation 
as  to  charging  expenditures  to  capital  or  plant  accounts  or 
to  operating  accounts. 

The  operating  items  after  being  verified  by  vouchers  and 
classified  for  each  year  should  be  segregated,  as  necessary 
operating  expenses  and  deductions  from  income,  the  latter 
being  such  expenditures  as  are  not  imperatively  required 
for  the  manufacture  and  delivery  of  the  particular  utility 
considered. 

For  instance,  bad  debts  are  deductions  from  income  not 
varying  operating  cost.  Voluntary  contributions,  adver- 
tising campaigns  of  education  and  extraordinary  expendi- 
tures of  all  sorts  may  be  justifiable  as  good  business  policy, 
but  are  not  necessary  operating  cost.  Deductions  from 
income  are  not  indisputably  necessary  costs  and  may  not 
have  the  approval  of  the  arbitrators  or  courts  as  displaying 
good  business  judgment,  and  may  be  rejected  by  them  in 
whole  or  in  part.  Personally  the  writer  favors  a  liberal 
allowance  for  deductions  for  income.  (See  Chapter  II.) 

When  this  segregation  is  completed  it  is  then  necessary 
to  divide  the  selected  necessary  operating  expenses  into  two 
classes : 

(1)  Time  expenses  which  like  rent,  office  salaries  and 
expenses,    insurance,    taxes,    etc.,    grow    regularly 
with  the  passage  of  time,   and   are   often  called 
service  costs. 

(2)  Proportional  expenses  which  increase  and  decrease 
with  the  commodity  sales,  such  as  the  raw  material 
and  productive  labor  required  in  proportion  to  the 
commodity  sold. 


198  PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

These  are  often  called  commodity  costs.  The  reason  for 
this  last  classification  is  that  water,  gas,  and  electricity  are 
often  sold  by  a  meter  which  measures  the  commodity  only, 
and  not  the  service  rendered. 

In  Chapters  II  and  III  are  given  careful  practical  examples 
of  rate  making,  in  which  by  natural  laws  of  prices  and  stepped 
rates,  the  service  rendered  is  approximately  included  in  the 
bill  to  consumers. 

Complete  balance  sheets  of  each  year  should  be  obtained 
and  be  carefully  compared  and  dissected  by  tabulations  and 
perhaps  graphic  methods. 

The  original  structural  cost  of  the  plant  if  recorded  should 
be  carefully  compiled  and  compared  with  the  present  value 
of  the  existing  plant  if  possible. 

The  records  of  issues  of  securities  should  be  arranged 
chronologically  and  compared  with  the  assets  of  even  dates. 

Unfortunately  the  records  of  many  utilities  are  out  of 
existence  and  so  the  means  of  an  exhaustive  analysis  are  not 
procurable,  but  so  far  as  possible  the  entire  financial  and 
physical  history  of  a  public  utility  should  be  related. 

A  chronological  chart  or  charts  showing  capital,  assets, 
income,  expenditures  and  profits  in  dollars  for  each  year, 
will  enable  a  good  grasp  of  the  history  of  a  utility. 

The  methods  of  making  use  of  these  results  require  much 
thought  and  ingenuity  to  disentangle  the  real  facts  from  a 
mass  of  inconsistent  and  careless  expenditures,  occasioned 
by  other  motives  than  a  desire  for  the  welfare  of  the  concern. 

Chapter  II  has  been  introduced  as  an  example  of  about 
everything  that  is  bad  in  business  and  Chapter  III  as  of  a 
very  good  business  management,  barring  excessive  capitaliza- 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT  199 

tion  which  was  not  considered  or  an  opinion  asked  for  in 
my  report  to  the  City  of  Minneapolis. 

<  From  a  comparison  of  the  appraisements  and  accounts  of 
differently  situated  utilities  many  enlightening  inferences 
can  be  drawn,  as  will  subsequently  be  shown  in  this  book. 

To  the  appraiser  I  would  say,  that  however  great  his  con- 
fidence may  be  in  his  accountants,  he  cannot  safely  forego  a 
detailed  personal  study  of  the  accounts  of  the  utility  con- 
sidered if  he  desires  to  learn  the  salient  features  and  con- 
trolling factors  of  its  business  for  valuation  or  for  rate 
making  purposes. 


CHAPTER  XIV. 

THE  LAW  OF  DEMAND  FOR  ELECTRICITY;  REDUCTION 
OF  PRICE  INCREASES  PROFITS. 

This  chapter  is  part  of  a  series  of  reports  made  at  the 
request  of  Hon.  James  Logan,  Mayor  of  Worcester,  Massa- 
chusetts, who,  believing  that  owing  to  the  high  average  price 
and  restricted  sales  of  the  Worcester  Electric  Light  Com- 
pany, 1909,  the  City  under  his  protection  was  not  being 
given  an  equal  opportunity  with  other  Massachusetts  cities 
to  develop  its  minor  manufactures,  and  was  also  being  over- 
charged for  street  lighting;  employed  the  writer  to  seek  out 
the  roots  and  foundations  of  electric  rates,  and  to  compare 
the  sales  of  electricity  in  Worcester  with  the  sales  of 
like  cities. 

Mayor  Logan  was  successful  and  obtained  a  reduction  of 
about  $10,000  per  year  in  Worcester's  street  lighting  and  the 
Worcester  Electric  Light  Company  is  now  building  a  new 
power  station  having  about  four  times  the  capacity  of  its 
station  of  1909  because  the  company  finally  agreed  with 
Mayor  Logan's  views. 

FAIR  AND  REASONABLE  RATES  FOR   ELECTRIC  LIGHT  AND 
POWER  IN  WORCESTER,  MASS.,  1910. 

To  reach  practical,  profitable  and  judicially  fair  prices 
for  the  various  applications  made  in  the  use  of  electricity, 
requires  difficult  and  intricate  computations  even  when  an 
accurate  appraisement  of  the  structural  cost  of  an  electric 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          201 

plant  together  with  depreciations  made  by  experienced  and 
fair  experts,  are  furnished  as  a  basis;  together  with  carefully 
segregated  operating  expenses  and  income  accounts  and  a 
complete  balance  sheet. 

In  the  case  of  Worcester,  the  only  appraisement  available 
is  derived  from  the  company's  book  assets  and  its  tax  re- 
turns. The  latter  is  not  of  great  authority  as  tax  assessors 
usually  place  as  high  a  value  upon  property,  as  they  think 
will  not  provoke  dispute. 

As  for  book  assets,  the  Interstate  Commerce  Commission 
makes  the  following  statement  as  to  the  deceptiveness  of 
these  records,  in  its  report  of  December  24,  1908.  "  Every 
balance  sheet  begins  with  cost  of  property  against  which  is 
set  a  figure  which  purports  to  stand  for  investment.  It  is 
sufficient  to  refer  to  the  well  known  fact,  that  no  court  or 
commission  or  accountant  or  financial  writer,  would  for  a 
moment  consider  that  the  present  balance  sheet  statement, 
purporting  to  give  the  cost  of  property,  suggests  even  in  a 
remote  degree  a  reliable  measure  of  money  invested  or  of 
present  value." 

In  the  discussion  of  the  case,  no  appraisement  is  available 
and  so  its  result  will  be  valuable  only  in  proportion  to  the 
nearness  of  the  book  assets  and  tax  valuation  to  the  truth. 

For  1910  the  following  values  were  found. 

Book  assets $1,547,041 .08 

Taxable  value 1,283,900.00 

Company's  valuation  of  plant 1,459,483.01 

Amount  of  capital  stock 800,000.00 


Cost  of  plant  more  than  capital $659,483.01 


202          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

Assuming  for  the  sake  of  argument  that  the  true  value 
and  the  true  operating  expenses  are  known  for  any  given 
period,  it  is  not  an  impossible  although  an  intricate  task  to 
fix  rates  yielding  an  assumed  even  rate  of  profit  on  the 
investment  for  the  particular  period  and  under  the  existing 
physical  conditions. 

To  attempt  to  fix  an  invariable  basis  for  further  prices 
without  being  able  to  also  fix  the  cost  of  raw  materials  and 
productive  labor  would  surely  lead  to  injustice  to  the  com- 
pany or  its  consumers.  To  attempt  to  fix  prices  for  a  short 
term  of  years  is  better  in  the  case  of  a  natural  monopoly 
such  as  an  electric  company,  but  has  not  always  produced 
good  results,  for  the  courts  and  commissions  usually  in- 
trusted with  this  responsibility  often  lack  an  intimate 
knowledge  of  details  required  to  prevent  them  from  falling 
into  pit  falls  and  thus  reaching  unjust  decisions. 

There  is  another  factor  which  enters  into  rate  making. 
It  is  a  most  important  one  and  takes  into  consideration  the 
human  elements  of  the  law  of  demand.  There  has  been  an 
increasing  struggle  on  the  part  of  the  public  for  lower  prices 
for  electricity,  and  as  will  be  presently  shown,  such  a  struggle 
has  not  been  unreasonable  nor  inconsiderate.  On  the  con- 
trary, lowered  prices  for  electricity  have  resulted  in  increased 
sales  per  capita,  thus  proving  an  advantage  and  material 
profit  to  the  electric  generating  company,  when  the  lowered 
rates  have  been  fixed  wisely  and  judicially. 

There  is  one  important  point  to  be  recollected,  for  it  is 
one  not  generally  grasped  in  the  discussion  of  prices  and  that 
is:  it  is  not  always  necessary  to  reduce  the  commodity  cost 
per  unit  of  supplying  electricity  to  increase  the  sales  and 
profit  of  the  company. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          203 

The  reason  is  this:  If  increased  sales  at  a  lower  profit 
per  unit  results  from  lowered  prices,  this  increased  sale  also 
reduces  the  investment  or  capital  per  unit  sold,  and  so  the 
same  or  greater  profits  or  dividends  may  result  from  lowered 
prices,  if  the  plant  and  time  or  service  costs  do  not  have  to  be 
appreciably  enlarged  for  the  greater  sales. 

Of  course,  the  possibilities  of  development  of  the  sales 
of  electricity  by  a  company  are  controlled  by  the  char- 
acteristics of  its  field.  A  manufacturing  city  is  better  than 
a  commercial  centre  and  it  in  turn  is  better  than  a  residential 
city. 

The  population  of  cities  appears  to  largely  affect  its  sales 
per  capita,  for  it  is  obvious  that  a  metropolis  containing 
large  office  buildings,  merchandise  stores,  theatres  and 
other  places  brilliantly  lighted  at  night  will  have  a  larger 
sales  per  capita  than  towns  which  have  not  reached  a  metro- 
politan stature.  This  change  from  a  mere  town  to  a  me- 
tropolis appears  to  occur  at  about  75,000  population  and  the 
scale  of  expenditure  to  increase  with  it.  Worcester  with  its 
132,000  population  is  well  forward  in  its  metropolitan  de- 
velopment and  being  a  manufacturing  city  offers  an  almost 
unlimited  field  for  the  future  sale  of  electricity  at  fair  rates. 

For  the  purpose  of  discovering  the  practical  relation  be- 
tween the  average  price  and  the  sales  per  capita  of  elec- 
tricity, the  report  of  the  Board  of  Gas  and  Electric  Light 
Commissioners  of  Massachusetts,  June  30,  1908,  may  be 
employed. 

The  published  scale  of  prices  (subject  to  discounts)  of 
15  electric  companies  serving  the  largest  cities  in  Massa- 
chusetts will  only  mislead.  The  average  sales  and  prices 
are  obtained  as  follows,  and  while  not  closely  accurate  in  a 


204          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

technical  sense,  they  are  near  enough  for  our  commercial 
purposes  (Report  Table  7,  page  CCXXXV).  From  the 
total  K.W.H.  generated  are  subtracted  K.W.H.  generated 
for  street  lighcing.  The  remainder,  divided  into  K.W.H. 
sold  to  consumers,  gives  the  per  cent  efficiency  of  distribution 
for  consumers,  and  is  approximately  the  efficiency  of  the 
whole  system  with  sufficient  accuracy  for  commercial  com- 
parisons. The  total  K.W.H.  generated,  multiplied  by  per 
cent  efficiency  of  distribution,  gives  total  K.W.H.  sold. 
This  is  rudely  approximated  in  the  abstract  given. 

As  each  city  differs  from  the  other  in  population  (census 
1905)  the  K.W.H.  sold  per  capita  is  found  by  dividing  the 
total  K.W.H.  sold  by  the  population. 

The  average  price  per  K.W.H.  sold  is  found  by  dividing 
the  total  income  by  the  total  K.W.H.  sold. 

The  revenue  per  capita  is  found  by  dividing  the  total 
income  by  the  population,  and  this  is  checked  by  multi- 
plying the  K.W.H.  sold  per  capita  by  the  average  price 
per  K.W.H. 

The  small  variations  found  are  of  no  consequence  in  the 
present  research. 

The  profit  per  capita  is  found  similarly,  and  is  given  to 
assure  against  the  use  of  unprofitable  precedents. 

The  sales  per  capita  in  K.W.H.  is  the  index  of  the  working 
of  the  law  of  supply  and  demand  at  a  given  average  price. 

It  answers  the  question,  "What  will  the  people  buy  at  a 
given  average  price?" 

The  profits  per  capita  tell  what  the  electric  company  can 
realize  at  a  given  price. 

It  tells  how  good  an  electric  company's  management  is, 
just  as  the  profit  per  acre  tells  how  good  a  farmer  is,  or,  at 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          205 

least,  how  his  farm  is  cared  for  when  compared  with  others 
of  equal  fertility. 

For  this  reason  the  results  in  Boston  cannot  be  compared 
with  those  of  the  other  cities  in  Massachusetts. 

In  so  large  a  metropolis,  the  teeming  multitudes  and  the 
irresistible  tide  of  business  activity  would  make  it  difficult 
to  escape  a  sale  of  100  K.W.H.  per  capita,  and  Boston  must 
be  used  only  in  comparison  with  other  large  metropolitan 
cities. 

By  sheer  good  management  Boston  has  been  surpassed 
in  K.W.H.  sales  per  capita  both  by  Springfield  and  Salem. 

By  reason  of  the  relatively  high  price  per  K.W.H.  main- 
tained and  borne  by  metropolitan  necessities,  Boston's 
profits  per  capita  $3.08  are  larger  than  the  revenue  per 
capita  of  any  of  the  17  cities,  except  Lynn,  $4.16;  Spring- 
field, $5.39;  Brocton,  $3.59;  Haverhill,  $4.10;  Salem,  $4.99; 
and  Fitchburg,  $3.97. 

Boston's  revenue  per  capita  is  $6.40,  and  its  average 
price  6.2c.  per  K.W.H. 

Brockton,  like  Boston,  because  of  its  relative  seniority 
and  retention  of  high  prices  for  electricity,  must  be  excluded 
from  comparison  with  the  remaining  15  Massachusetts  cities 
selected. 

This  leaves  15  cities,  ranging  from  33,000  to  132,000 
population,  for  use  in  tracing  the  relation  between  price 
per  K.W.H.  and  sales  per  capita  in  K.W.H.  as  graphically 
shown  in  the  figure. 

The  profit  per  capita  is  of  interest,  but,  as  the  cost  of  the 
various  managements  per  K.W.H.  enters  in,  is  of  no  value 
save  to  prove  the  vagaries  of  managers,  as  against  the  rela- 


206 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 


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PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          207 


MASSACHUSETTS  ELECTRIC 

LIGHTING 


208          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

tively  regular  response  of  the  mass  of  consumers  to  reductions 
in  prices. 

It  is  interesting  to  note  that  both  the  revenue  and  profit 
per  capita  appear  generally  to  increase  with  lowered  prices. 

Per  capita 

Name                    Price  Revenue  Profit                 Sales 

1.  Springfield 4.86c.  $5.39  $2.45  111  K.W.H. 

2.  Salem 4.80c.  5.00             1.75  104 

3.  Haverhill 4.51c.  4.10             1.18             91 

4.  Fitchburg 4.57c.  3.97             1.42             87 

5.  Lynn 5.41c.  4.16             1.65             77 

6.  Lowell 5.19c.  2.94            0.97             57 

7.  Cambridge 5.79c.  3.05             1.34             33        " 

Totals  .  .          . .  35 . 13c.        $28 . 61         $10 . 76  580 


Averages ....  5 . 02c.  4.13  1 . 54  83 

The  remaining  eight  cities  in  the  abstract  give  the  follow- 
ing results. 

Per  capita 

Name  Price  Revenue  Profit  Sales 

1.  Lawrence 7.16c.  $2.46  $1.07  34  K.W.H. 

2.  Worcester 7.86c.  2.51  1.23  32 

3.  Newton 10.40c.  3.01  0.32  29 

4.  Maiden 8.89c.  2.57  0.83  29 

5.  Fall  River S.OOc.  2.24  0.64  28 

6.  Chelsea 8.37c.  2.25  0.88  27 

7.  Charlestown 9.80c.  1.86  0.55  19 

8.  New  Bedford . .      .  .  10 . 60c.  1 . 90  0 . 95  18 


Totals 71.08c.        $18.80          $6.47  216 

Averages 8.89c.  2.35  0.81  27 

The  average  practical  results  of  the  electric  light  com- 
panies' operations  of  15  cities  in  Massachusetts  are:  At 
an  average  price  of  5c.  per  K.W.H.  the  sales  per  capita 
(83  K.W.H.)  are  three  times  the  sales  (27  K.W.H.)  at  8.9c. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          209 

per  K.W.H.     The  profits  per  capita  ($1.54)  are  nearly  twice 
the  profits  (81c.)  at  8.9c.  per  K.W.H. 

It  does  not  necessarily  follow  because  sales  are  increased 
four  fold  that  the  investment  in  machinery  and  plant  re- 
quired be  even  doubled,  as  the  structural  capacity  of  a 
plant  is  fixed  by  the  coincident  demands  upon  it  in  K.W. 
and  not  by  its  annual  sales  in  K.W.H. 

MARKS'  EMPIRICAL  LAW  OF  DEMAND. 

Referring  again  to  the  figure,  the  hyperbolic  curve,  drawn 
to  scale,  threads  its  way  through  the  dots  representing  the 
various  cities  and  it  will  be  noted  in  the  cases  of  cities  having 
low  prices  and  high  sales  per  capita,  that  these  dots  more 
nearly  touch  the  average  curve  line  than  in  the  cases  of  the 
cities  adhering  to  high  prices  and  restricted  sales. 

The  law  of  increase  of  the  sales  per  capita  can  be  rudely 
approximated  by  the  curve  of  an  equilateral  hyperbola  giving 
average  results. 

Let  s  =the  sales  per  capita  in  K.W.H. 

Let  p  =the  average  price  per  K.W.H.  in  cents. 

The  equation  is 


If  p  =  4c.  s  =115  K.W.H.  Difference  for  Ic. 

If  p  =  5c.  s  =  83  K.W.H.  32  K.W.H. 

If  p  =  6c.  s  =  62  K.W.H.  21  K.W.H. 

If  p  =  7c.  s  =  46  K.W.H.  16  K.W.H. 

If  p  =  8c.  s  =  35  K.W.H.  11  K.W.H. 

If  p  =  9c.  s  =  26  K.W.H.  9  K.W.H. 

Ifp=10c.  s=  19  K.W.H.  7  K.W.H. 

Laying  down  this  equilateral  hyperbola  on  the  figure  it 
appears  to  average  the  practical  results  of  1908  very  closely, 


210          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

giving  a  general  empirical  law  of  supply  and  demand  for 
electricity  in  cities. 

The  interesting  facts  appear  that  while  a  reduction  of  from 
10  to  9c.  produces  an  increase  of  7  K.W.H.  per  capita,  an 
equal  reduction  of  the  average  price  from  5  to  4c.  produces 
an  increase  of  32  K.W.H.  per  capita,  or  about  4j/£  times  as 
much. 

At  lOc.  per  K.W.H.  the  sales  per  capita  are  19  K.W.H., 
and  at  5c.  83  K.W.H.,  or  over  four  times  as  great.  Present 
experience  does  not  appear  to  have  fixed  any  point  of  satiation 
for  consumers  or  minimum  price  for  electricity. 

It  is  particularly  of  value  to  learn  that  the  lowered  average 
price  of  the  first  group  of  seven  cities  results  in  revenue  and 
profits  per  capita  increasing  in  a  geometric  ratio  far  more 
rapidly  than  the  reduction  of  price  per  K.W.H.  made  from 
the  average  of  the  second  group  of  eight  cities,  and  that  this 
appears  to  be  irrespective  of  the  population  of  the  cities 
between  the  limits  selected. 

This  is  an  entirely  new  law  of  demand  and  it  should  be 
distinctly  understood  that  it  resulted  from  an  absolutely 
practical  derivation  and  is  not  scientifically  accurate  but 
only  empiric. 

PER  CENT  PROFITS  ACTUALLY  REALIZED. 

The  preceding  discussion  has  only  served  to  show  the 
increased  sales  per  capita  for  lowered  prices  for  electricity. 
Using  the  same  statistics  for  12  of  these  cities  in  Massa- 
chusetts it  will  be  shown  that  lowered  rates  bring  increased 
profit  to  the  electric  generating  company.  These  profits 


PRACTICAL    RATE   MAKING    AND   APPRAISEMENT          211 

are  based  on  tax  valuation,  that  being  the  only  valuation 
available  from  the  report  of  the  Board  of  Gas  and  Electric 
Light  Commissioners  of  Massachusetts.  The  tax  value  may 
be  less  than  the  real  value  of  the  plant  and  therefore,  in  the 
following  discussion,  an  apparently  smaller  investment  per 
K.W.H.  sold  may  result;  but  since  all  these  plants  were  taxed 
under  the  same  state  law,  these  reductions  of  apparent  value 
will  be  proportionate  and  still  leave  the  figures  available  for 
comparison. 

In  the  case  of  these  12  companies  the  cost  of  a  K.W.H. 
is  obtained  by  dividing  the  total  operating  expenses  by  the 
total  number  of  K.W.H.  sold.  Depreciation  for  the  current 
year  is  temporarily  omitted  from  expenses  and  will  be  con- 
sidered later.  The  tax  investment  per  K.W.H.  is  obtained 
by  dividing  each  company 's  tax  valuation  by  the  total  sales 
in  K.W.H. 

The  subjoined  table  gives  the  results. 

Table  Based  on  K.W.H.  Sold. 
First  Group  i 


Cities 
1  .  Springfield  .... 

Average 
Price 
4  86c 

Cents 
Cost 
per  K.W.H. 
2  64c 

Tax  Value 
Investment 
15  3c 

2.  Salem  

4  80c 

3  13c. 

10  8c 

3.  Haverhill  

4  31c. 

3  21c. 

11  9c 

4.  Fitchburg 

4  57c 

2  99c 

13  4c 

5.  Lynn  . 

5  41c 

3  27c 

8  5c 

6.  Lowell  

5  19c 

3  50c 

19  3c 

7.  Cambridge  

5  79c 

3  24c 

20  2c 

Averages 5.02c.  3. 14c.  14. 2c. 

Investment   profit   per 

K.W.H 1.88c.  or  13.2%  of  14. 2c. 


212          PRACTICAL   RATE    MAKING    AND    APPRAISEMENT 

Second  Group: 

I.Lawrence 7.16c.  4.06c.  18. 9c. 

2.  Worcester 7 . 86c.  4 . 03c.  28 .  6c. 

S.Newton 10.40c.  9.33c.  14. 4c. 

4.  Maiden 8.89c.  6.05c.  22. Oc. 

5.  Fall  River 8.00c.  5.70c.  26. 9c. 


Averages 8.46c.  5.83c.  22 .2c. 

Investment   profit   per 

K.W.H 2.63c.  or  11 .0%  of  22. 2c. 

As  a  practical  fact,  it  may  be  observed  from  the  above 
tabulation  that  the  lower  price  (5.02c.)  produces  an  average 
profit  of  13.2  per  cent  as  against  a  lower  profit  of  11.9  per 
cent  for  the  price  of  8.46c.  per  K.W.H.  on  the  basis  of  tax 
valuation  of  the  investments  in  these  companies. 

With  the  exception  of  Springfield  favored  by  water  power, 
it  would  be  impossible  to  find  a  group  of  12  companies  oper- 
ating under  more  nearly  the  same  conditions  save  as  to  pop- 
ulation. 

it  is,  therefore,  safe  to  infer  that  an  average  reduction  of 
3.44c.  in  the  price  by  the  first  group  has  not  reduced  the  per- 
centage of  profit  on  the  investments  made  by  this  group's 
companies.  On  the  contrary,  the  profit  is  increased  1.3  per 
cent  by  the  lowering  of  the  prices,  and  the  sales  per  capita 
computed  by  the  law  of  demand,  previously  stated,  would 
increase  from  about  30.6  K.W.H.  per  capita  annually  to  82.5 
K.W.H.,  an  increase  of  nearly  threefold  in  sales. 

It  is  also  evident  from  the  last  figures,  that  lowered  prices 
per  K.W.H.  result  in  lowered  costs  per  K.W.H.  sold  by 
reason  of  the  increased  sales  per  capita.  This  is  illustrated 
in  the  figure  by  the  broken  line  average  cost  curve,  laid  down 
by  a  similar  method  to  the  price  curve.  This  curve  also 
appears  to  have  a  rude  approximation  to  the  hyperbolic 
law  (due  to  the  preponderance  of  time  or  service  costs)  and 


PRACTICAL   RATE    MAKING    AND    APPRAISEMENT         213 

to  be  a  function  of  the  sales  per  capita.  The  fact  may  be 
observed  that  the  price  and  the  cost  of  supplying  electricity 
move  down  together  as  the  sales  per  capita  increase  and  there 
always  is  an  average  profit  shown  on  each  K.W.H.  sold, 
which  varies  from  2J/2  to  1J/2  c.while  going  from  lOc.  to  4c. 
average  price  per  K.W.H.  sold. 

DEPRECIATION. 

Each  year,  in  order  to  compute  the  total  cost  per  K.W.H. 
sold  of  electricity,  it  is  necessary  to  include  the  depreciation 
per  K.W.H.;  and  yet  the  depreciation  cannot  be  considered 
as  proportional  to  K.W.H.  sales.  It  is  customary  in  many 
electrical  works  to  allow  a  certain  average  percentage  of  the 
value  of  the  works,  fixed  plant  or  as  above  figured  of  its 
taxable  value.  This  percentage  is  a  much  disputed  quan- 
tity, but  in  fairly  equipped  works  it  is  hardly  ever  claimed  to 
be  less  than  3  per  cent  or  over  7  per  cent.  In  fact,  any  per- 
centage is  a  guess  and  a  careful  inventory  and  appraisement 
furnishes  the  only  means  of  fixing  depreciations  accurately. 
In  this  appraisement  care  must  be  taken  to  discriminate 
between  physical  decay,  obsolescence  and  inadequacy  of 
plant.  The  current  repairs  are  usually  charged  to  operating 
expenses  as  they  occur,  and  physical  decay  becomes  less  in 
proportion  to  the  thoroughness  of  repairs. 

In  the  12  Massachusetts  companies  cited,  the  depreciation 
is  not  charged  to  operating  expenses,  but  is  charged  directly 
to  profit  and  loss,  if  at  all,  and  credited  to  various  accounts. 
If  one  assumes  the  extremely  liberal  average  of  7  per  cent 
depreciation,  the  first  group  of  seven  low  priced  companies 
earning  13.2  per  cent  is  able  to  divide  6.2  per  cent  of  the  tax 


214          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

value  and  to  put  aside  7  per  cent  reserve  depreciation  fund; 
and  the  second  group  of  five  higher-priced  companies  earning 
11.9  per  cent  is  able  only  to  divide  4.9  per  cent  and  put 
aside  7  per  cent. 

For  the  first  group  the  following  obtains: 

Price 5.02c.  per  K.W.H. 

Operating  expense 3 . 14c.  "         " 

Depreciation 0.99c.    4. 13c.    " 


Net  earning 0 . 89c.    " 

For  the  second  group  the  following  obtains: 

Price 8.46c.  per  K.W.H 

Operating  expense 5.83c.  "         " 

Depreciation 1 ,55c.    7.48c.    "         " 


Net  earning 0 . 98c.    " 

The  second  group  shows  the  larger  profit  per  K.W.H.,  but 
it  gives  a  smaller  per  cent  profit  on  the  investment  made. 

The  explanation  of  this  stubborn  series  of  facts  appears 
to  be  the  following:  With  a  rational  method  of  lowering 
prices,  the  response  of  the  public  to  it  is  a  sure  increase  of 
sales  per  capita  according  to  the  law  of  demand  previously 
exhibited.  The  increased  sale  of  energy  results  in  a  de- 
creased operating  service  cost  per  K.W.H.  sold  and  also 
usually  results  in  a  decreased  investment  and  depreciation 
per  K.W.H.  sold,  since  depreciation  depends  principally 
upon  time  and  the  cost  of  investment. 


CHAPTER  XV. 
GAS  SALES  PER  CAPITA. 

The  contents  of  this  chapter  were  first  published  in  1909. 
They  cannot  pretend  to  be  given  with  scientific  accuracy 
nor  do  I  think  in  any  commercial  matter  such  as  this,  that 
the  personal  vagaries  of  men,  and  communities  of  men,  can 
be  sufficiently  eliminated  to  be  reduced  to  scientific  accuracy. 

But  the  law  of  increasing  demand  with  reduction  of  price 
is  as  clearly  indicated  for  gas  as  it  was  for  electricity  in  the 
previous  chapter.  Gas  can  be  stored  for  one  day,  electricity 
cannot. 

The  service  costs  growing  with  time  do  not  form  so  large 
a  proportion  of  the  total  cost  of  gas  as  they  do  with  elec- 
tricity, and  so  there  cannot  be  so  rapid  a  reduction  of  price 
in  stepped  rates  for  it,  to  large  consumers  of  gas;  as  there 
can  be  for  electricity.  Nevertheless  there  is  a  great  profit 
both  to  the  producer  and  to  the  business  community  in 
properly  reduced  rates  to  large  gas  consumers. 

To  the  constructing  engineer  and  to  the  gas  manager  the 
most  important  quantity  to  be  determined  is  the  attainable 
sales  of  gas  per  capita  for  any  population  served.  Without 
it  the  constructing  engineer  has  no  basis  from  which  to 
compute  the  required  capacity  of  the  works  installed  to 
serve  any  community  and  the  gas  manager  no  definite  idea 
of  his  aim  or  limitations  in  the  operation  of  his  gas  plant. 
With  it,  it  is  possible  to  fix  the  capacity  of  a  gas  plant  intelli- 
gently in  advance  of  construction  and  to  allow  for  future 


216          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

enlargements.  For  the  gas  manager  it  is  possible  to  fix  the 
lowest  price  for  gas  which  will  yield  the  greatest  attainable 
profitable  sales  for  his  stockholders  and  thus  to  wisely  serve 
both  stockholders  and  gas  consumers. 

In  an  attempt  to  find  the  factors  controlling  the  sales  of 
gas  per  capita  it  is  first  necessary  to  disembarrass  the  prob- 
lem of  all  factors  of  little  influence  upon  it. 

For  instance  the  illuminating  power  of  ordinary  artificial 
gas  exceeding  14  to  16  candle  power  does  not  appear  to 
largely  affect  the  volume  of  its  sales  per  capita.  This  will 
presently  be  shown  by  means  of  data  from  the  reports  of 
the  Massachusetts  Gas  and  Electric  Light  Commission  and 
Brown 's  Directory  of  American  Gas  Companies. 

The  cost  of  making  gas  need  not  be  considered  in  the  dis- 
cussion of  the  laws  connecting  the  population  served,  and 
its  price  per  1,000,  with  its  average  annual  sales  per  capita. 
For  the  present  at  least  the  cost  of  gas  and  its  profits  can 
be  neglected  until  the  natural  laws  controlling  annual  sales 
per  capita  are  deduced. 

It  must  not  be  forgotten  that  there  are  exceptional 
communities  to  which  no  generally  deduced  rule  will  apply 
and  that  average  results  are  somewhat  affected  by  the 
management  of  individuals. 

Nevertheless  there  appears  to  be  a  general  law  or  perhaps 
two  laws,  enabling  sufficiently  accurate  predictions  (to 
serve  for  commercial  purposes)  to  be  made  for  average 
communities. 

The  sales  per  capita  is  the  index  of  the  need  of  disposition 
of  the  individual  consumer  to  buy  gas.  This  is  varied  some- 
what by  many  local  conditions. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          217 

The  competition  of  electric  lighting  does  not  in  busy 
communities  appear  to  reduce  the  sales  of  gas;  for  by  reason 
of  the  great  brilliancy  of  electric  lighting  a  rivalry  in  illu- 
mination is  created  that  usually  increases  the  sales  of  gas. 

The  introduction  of  economical  methods  of  gas  lighting 
appears  only  to  cause  a  temporary  slackening  of  the  sales  of 
gas  and  ultimately  increases  it. 

The  gas  wars  which  occasionally  occur  between  gas  com- 
panies increase  the  sales  of  gas  per  capita  and  it  appears  as 
if  any  gain  made  during  them  remains  although  the  price 
of  gas  is  again  raised  at  the  close  of  the  war. 

High  prices  for,  or  temporary  dearth  of  fuel,  appears  to 
force  an  increase  of  sales  of  gas  for  cooking  and  heating 
purposes. 

Aberrations  in  sales  per  capita  resulting  from  the  above 
causes  are,  however,  of  a  temporary  nature  and  relatively 
inconsiderable,  when  compared  with  the  populations  served 
or  the  prices  fixed,  which  are  two  factors  which  appear  to 
have  a  controlling  influence  upon  the  annual  sales  of  gas  per 
capita. 

The  history  of  the  gas  sales  upon  the  island  of  Manhattan 
illustrates  in  a  most  vivid  manner  the  concrete  results  of 
an  exploration  of  this  new  field. 

In  1888  the  competition  of  electric  lighting  became  com- 
mercially noticeable.  The  price  of  gas  was  $1.26  per  1,000 
cu.  ft.  and  the  sales  per  capita  5,626  cu.  ft.  to  a  population 
of  1,386,000.  In  1892  the  Welsbach  mantle  light  was  com- 
ing into  use  as  a  competitor  of  electric  lighting.  The  price 
of  gas  was  $1.25  per  1,000  cu.  ft.  and  the  sales  per  capita 
6,357  cu.  ft.  to  a  population  of  1,523,000.  In  1895  the  sales 
per  capita  had  fallen  to  6,321  cu.  ft. 


218          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

In  the  years  of  1899-1900  a  gas  war  arose  on  the  island  of 
Manhattan.  The  New  Amsterdam  Gas  Co.  sold  gas  for 
50c.  and  the  Consolidated  Gas  Co.,  the  New  York  Mutual 
Gas  Co.  and  the  Standard  Gas  Co.  sold  gas  for  65c.  per 
1,000  cu.  ft.  during  parts  of  these  years. 

In  1900  the  average  price  of  gas  was  82c.  per  1,000  cu.  ft. 
and  the  sales  per  capita  8,128  cu.  ft.  to  a  population  of 
1,850,000.  In  the  year  1900  the  price  of  gas  was  put  back 
to  $1  per  1,000  cu.  ft.  and  the  sales  per  capita  remained  with- 
out increase.  The  average  price  of  gas  was  98c.  per  1,000 
cu.  ft.  and  the  sales  per  capita,  8,135  cu.  ft.  to  a  population 
of  1,903,000. 

The  anthracite  coal  strike  and  famine  occurred  in  the 
winter  of  1902-3. 

In  1903  the  price  of  gas  was  99c.  per  1,000  cu.  ft.  and  the 
sales  per  capita  9,328  cu.  ft.  to  a  population  of  2,007,000. 
In  1904  the  price  of  gas  was  99c.  per  1,000  and  the  sales  per 
capita  9,426  cu.  ft.  to  a  population  of  2,060,000.  In  1905 
the  price  of  gas  was  $1  per  1,000  cu.  ft.  and  the  sales  per 
capita  fell  to  9,250  cu.  ft.  to  a  population  of  2,112,000. 

During  all  of  the  period  1888  to  1906  the  gross  sales  of 
gas  on  Manhattan  increased  yearly  but  in  1904  the  sales 
per  capita  increased  little  and  in  1905  decreased  showing 
an  indisposition  on  the  part  of  consumers  to  increase  their 
use  of  gas  without  a  reduction  in  its  price  per  1,000  below  $1. 

Without  a  reduction  in  price  it  appears  as  if  its  future 
increase  in  gross  sales  must  be  due  to  an  increase  in  popula- 
tion only,  of  Manhattan. 

The  above  figures  for  Manhattan  are  taken  from  an  ex- 
hibit in  the  well  known  "80c.  gas  case"  of  the  City  of  New 


PRACTICAL   RATE    MAKING   AND    APPRAISEMENT          219 

York  and  are  used  because  its  great  and  compressed  popula- 
tion eliminates  minor  causes  of  variation  from  average  results 
in  New  York. 

From  graphical  studies  made  in  this  search  for  an  em- 
pirical formula  for  either  the  price  or  sales  per  capita  it 
appears  that  the  towns  in  Massachusetts  under  considera- 
tion divide  themselves  into  two  groups. 

The  Metropolitan  group  for  cities  above  75,000  popula- 
tion and  the  town  group  for  towns  and  villages  under  75,000 
population. 

From  a  population  of  2,000  to  75,000  the  sales  per  capita 
appear  in  most  instances  to  depend  almost  entirely  upon  the 
price  of  gas  regardless  of  population. 

Above  75,000  the  sales  per  capita  appear  to  be  decidedly 
dependent  upon  the  population,  increasing  from  an  amount 
fixed  by  the  density  of  population  as  the  price  of  gas  is 
lowered. 

A  moment's  reflection  on  the  altered  conditions  of  night 
life  in  a  metropolis  as  compared  with  that  of  a  village  will 
assure  one  of  the  reasonableness  of  this  separation  into  two 
groups. 

About  75,000  population  appears  to  be  the  dividing  line. 

Tabulating  the  results 

Price  of  gas  per  Annual  sales  per  Gross  revenue 

1,000  cu.  ft.  1901  capita,  cu.  ft.  per  capita 

$2.25  383  $0.86 

2.00  584  1.17 

1.75  843  1.48 

1.50  1,187  1.78 

1.25  1,669  2.09 

1.00  2,393  2.39 


220          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

It  will  be  noted  that  a  reduction  of  price  from  $2  to  $1 
quadruples  the  sales  per  capita  and  doubles  the  gross  revenue 
per  capita. 

The  above  empirical  table  was  deduced  from  the  results 
of  about  60  gas  companies  in  the  town  group  taken  from  the 
report,  for  1901,  of  the  Massachusetts  gas  and  electric  light 
commission  and  has  again  been  checked  by  the  average 
results  of  the  same  companies  for  1907,  as  will  presently  be 
shown. 

Grouping  according  to  prices  and  deducing  averages  as 
they  actually  are  after  6  years  we  have 

Price  of  gas  per  Annual  sales  per          Gross  revenue 

1,000  cu.  ft.  1907  capita,  cu.  ft.                per  capita 
$2.25  (non-existent) 

2.00  722  $1.44 

1.75  898  1.57 

1.50  1,395  2.09 

1.25  2,539  3.17 

1.00  3,824  3.82 

The  above  tabulation  is  computed  by  dividing  the  gross 
revenue  of  each  group  of  gas  companies  averaging  prices 
within  12J^c.  each  way  of  the  standard  price,  by  the  standard 
price,  and  then  by  the  population  served,  to  obtain  the  an- 
nual sales  per  capita,  in  an  approximate  manner.  Com- 
paring with  the  previous  1901  table  we  see  that  for  $2  and 
$1.75  the  gain  is  relatively  small  and  for  $1.50,  $1.25  and 
$1.00  the  gains  are  respectively  about  308,  870  and  1,431 
cu.  ft.  in  6  years;  240  cu.  ft.  per  capita  annually  is  this  increase 
for  $1  gas.  These  gains  are  not  due  to  any  reduction  in  the 
price  of  gas,  but  principally  to  the  multifarious  advances  in 
methods  of  lighting,  to  cooking  apparatus,  and  to  the  tem- 
porary economical  use  of  gas  for  heating  and  power. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          221 

It  can  be  expected  to  continue  at  the  rate  of  4  to  6  per 
cent  annually  for  the  same  reasons,  in  most  cases. 

Referring  now  to  the  increases  shown  for  each  reduction 
of  25c.  per  1,000  cu.  ft.  in  price,  we  have 

Price  of  gas  per  Annual  sales  per  Increased  sales 

1,000  cu.  ft.  1907  capita,  cu.  ft.  per  capita,  cu.  ft. 

$2.00  722  

1.75  898  176 

1.50  1,395  497 

1.25  2,535  1,140 

1.00  3,824  1,289 

The  reduction  in  price  from  $1.25  to  $1  appears  to  produce 
an  increase  of  about  50  cu.  ft.  per  capita  for  each  one  cent. 

Since  increased  sales  are  apt  in  the  case  of  most  gas  works 
to  produce  a  reduction  in  the  invested  capital  per  annual 
1,000  and  therefore  to  require  a  smaller  manufacturing  profit 
per  1,000  cu.  ft.  sold  to  pay  as  great  or  greater  dividends  on 
the  capital  stock  this  average  increase  of  sales  becomes  a 
pivotal  factor  in  the  expansion  of  gas  sales,  and  of  gas  works. 

I  have  omitted  the  laborious  computations  of  the  above 
tabulations  as  requiring  too  much  space,  but  as  the  method 
is  stated  they  can  be  verified  by  anyone.  Boston,  Cottage 
City,  Worcester  County  and  a  few  other  gas  companies 
selling  gas  in  bulk  have  been  omitted  for  obvious  reasons. 

In  making  use  of  the  empirical  results  derived,  the  first 
table  will  probably  give  the  best  results  in  entirely  new  enter- 
prises, and  the  second  tabulation  will  be  better  for  the  con- 
sideration of  the  probable  results  of  gas  works  which  have 
been  in  operation  for  a  number  of  years  in  the  town  groups. 


222 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 


CONSIDERING   AND   TABULATING   THE   LARGER   CITIES   OF 
MASSACHUSETTS  . 

The  metropolitan  groups  of  the  gas  works  serving  more 
than  a  population  of  75,000  appear  to  distinctly  show  the 
effect  of  crowded  populations  upon  the  habits  of  the  com- 
munity, in  a  larger  use  of  gas  per  capita  regardless  of  small 
differences  in  prices. 


Massachusetts         Popu- 
Towns,  1907          lation 

Boston 504,063 

Lynn 88,436 

Lowell 106,295 

Cambridge 97,434 

Springfield 89,281 

Fall  River 105,762 

Worcester 128,135 

Lawrence 89,972 

New  Bedford 74,362 

Lawrence,  3,619,  and  New  Bedford,  3,088,  fall  below  the 
average  sales  per  capita  (3,824  cu.  ft.)  of  towns  below  75,000 
population  selling  gas  at  $1  per  1,000;  they  are  on  the  border 
land  between  metropolitan  cities  and  towns. 

It  has  already  been  shown  that  the  natural  annual  growth 
of  sales  per  capita  averages  240  cu.  ft.  at  a  constant  price 
of  $1,  and  that  it  is  considerably  less  for  higher  prices. 

If  we  eliminate  this  natural  annual  increment  not  due  to 
price  we  can  isolate  the  effect  of  a  reduction  of  prices  in  the 
above  tabulated  group  of  metropolitan  cities  selling  gas  at 
prices  ranging  from  98c.  to  84c.  per  1,000  cu.  ft.  at  the 
consumer's  meter. 

While  the  increase  of  sales  per  capita  appears  to  be  about 
50  cu.  ft.  for  each  cent  reduction  of  price  in  towns  selling 


Price 
per 

Sales 
per 

Gross 
Revenue 
per 

1,000 

capita 

capita 

Remarks 

$0.80 

7,447 

$5.95 

Sliding    Scale 

0.84 

5,404 

4.54 

$0.99  in  1903 

0.94 

5,043 

4.74 

1.00  "  1901 

0.91 

5,465 

4.97 

1.01 

1905 

0.95 

4,209 

4.00 

1.00 

1905 

0.91 

3,957 

3.60 

1.01 

1905 

0.90 

3,853 

3.46 

1.01 

1905 

0.97 

3,619 

3.61 

1.01 

1906 

0.98 

3,088 

3.02 

1.19       1905 

PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          223 

at  from  $1.25  to  $1  it  will  be  seen  that  the  average  increase 
in  cities  is  about  40  cu.  ft.,  although  their  average  sales  per 
capita  is  greater  than  in  towns. 


1907 

Sales         Sales  Gain  due 

per       per  capita  Differ-  Gain  due      to  re-  For 

Massachusetts  capita     and  date  ence     to  time  duction  Ic. 

towns          cu.  ft.  year      cu.  ft.  cu.  ft.  yrs.  cu.  ft.  cts.  cu.  ft.  cu.  ft. 

Lynn 5,404  1903.  .3,616  1,788    4.  .    960  15.  .828  55 

Lowell 5,043  1901.. 3,352  1,691    6.. 1,440      6.  .251  43 

Cambridge 5,465  1905 .  .  4,504  961    2 .  .    480  10 .  .  481  48 

Springfield 4,209  1905.  .3,491  718   2..    480      5.  .238  47 

Fall  River 3,957  1905 .  .3,036  921    2 .  .    480  10 .  .441  44 

Worcester 3,853  1905.  .3,205  648   2.  .    480  11.  .168  15 

Lawrence 3,619  1906.  .3,229  390    1.  .    240      4.  .150  38 

New  Bedford. ..  3,088  1905.  .2,233  855   2..    480  11..  375  34 


Average 4,330  Average  40 

It  would  be  insincere  to  claim  that  this  average  of  40  cu. 
ft.  increase  of  sales  per  capita  for  each  Ic.  reduction  is  any- 
thing more  than  a  rudely  approximate  commercial  quantity 
indicating  that  while  the  increase  of  sales  per  capita  always 
appears  for  each  reduction  in  price  it  is  still  a  quantity 
affected  by  obscure  causes  and  limitations  which  must  be 
found,  and  allowed  for  in  each  individual  case  under  consid- 
eration. 

Boston,  with  its  brilliant  example  of  an  increase  of  2,000 
cu.  ft.  per  capita  in  a  few  years,  is  not  used,  since  until  its 
present  management  was  installed  its  affairs  were  in  a 
chaotic  state. 

The  earlier  dates  for  computation  of  the  above  table  were 
selected  from  consideration  of  the  changes  in  average  prices, 
without  regard  to  possible  results. 


224  PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

The  important  questions  to  be  answered  are: 

1.  Does  an  increase  per  capita  always  follow  a  reduction 
in  the  price  of  gas? 

The  answer  is  yes  under  usual  conditions. 

2.  How  much  average  increase  of  annual  sales  per  capita 
can  be  expected  to  follow  each  reduction  in  price? 

The  answer  is:  For  gas  at  $1  to  $1.25  per  1,000  cu.  ft. 
about  50  cu.  ft.  for  each  cent  reduction  and  for  gas  below  $1 
about  40  cu.  ft.  for  each  cent  reduction,  on  an  average  under 
usual  conditions. 

In  its  enlightened  methods  of  dealing  with  public  service 
utilities  Massachusetts  is  a  quarter  of  a  century  ahead  of  the 
rest  of  the  United  States. 

In  no  other  state  and  particularly  not  in  the  statistical 
publications  issued  at  great  cost  by  the  nation  from  Wash- 
ington can  be  found  data  clearly  stated,  enabling  a  rational 
and  practical  discussion  of  the  gas  business  in  complete  detail. 

A  few  cases  of  the  larger  cities  will  serve  to  give  an  idea 
of  the  sales  per  capita  in  1907. 

Sales 
City  Price  Yeai      per  capita 

New  York,  Manhattan $1.00  1907     9,375  cu.  ft. 

1.00  1905     9,250      " 

.1.00  1904     9,426      « 

Population,  2,217,293. 

New  York,  Brooklyn 0.80  1907     6,421      « 

Population,  1,358,891. 

Pennsylvania,  Philadelphia.    1.00  1907     7,139      u 

Population,  1,300,000. 
Public  buildings  and 
streets  free. 

Missouri,  St.  Louis 0.80  &  0.60    1907     6,000      « 

Population,  750,000. 


PRACTICAL    RATE    MAKING   AND    APPRAISEMENT          225 

Ohio,  Cincinnati 0.75  «  0.50    1907     9,231  cu.  ft. 

Population,  325,000. 
Maryland,  Baltimore 1.00  "  0.85  1907  4,541  « 

Population,  600,000. 
California,  San  Francisco. . .  0.85  1907  7,024  « 

Population,  360,000. 
Louisiana,  New  Orleans. .  .  .  1.15  1907  1,714  « 

Population,  350,000. 
Michigan,  Detroit 0.90  to  0.50  1907  7,000  « 

Population,  305,000. 
Wisconsin,  Milwaukee 0.80  «  0.60  1907  6,371  tt 

Population,  350,000. 
District  of  Columbia,  Wash.  1.00  1907  6,020  « 

Population,  307,457. 

These  variations  in  sales  suggest  at  once  an  investigation 
of  the  local  causes  of  the  disparity  in  sales  per  capita. 

For  each  case  the  reason  at  once  suggests  itself  and  can  be 
traced  to  the  needs  of  the  population  or  to  the  characteristic 
management  of  the  various  gas  companies. 

'  Of  metropolitan  cities  Buffalo,  Cleveland  and  Pittsburgh 
have  natural  gas  and  cannot  be  compared  with  others 
without  it. 

Manhattan,  New  York,  has  oscillated  up  and  down  for 
three  years  awaiting  a  further  reduction  in  price  when  it 
will  further  surpass  Cincinnati  in  rank. 

Detroit,  Milwaukee,  St.  Louis  and  San  Francisco  show 
good  results  of  low  prices  and  detailed  classification  of 
consumers. 

Philadelphia  and  Brooklyn  have  not  larger  sales  because 
the  former  is  not  permitted  to  charge  less  than  $1  and  the 
latter  claims  the  right  to  collect  $1,  although  it  accepts  80c. 
on  account. 


226          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

New  Orleans  reveals  the  effect  of  a  large  population  that 
does  not  purchase  gas. 

The  increase  per  capita  of  Boston  under  the  sliding  scale 
has  been  marvellous  in  the  last  three  years. 

The  annual  sales  per  mile  of  main,  per  meter  and  per  ton 
of  coal,  usually  so  carefully  stated  in  the  analyses  of  gas- 
works statistics,  are  artificial  details  useful  and  necessary 
to  the  engineers  of  gas  works  only. 

The  annual  sales  of  gas  per  capita  is  the  gage  of  the 
natural  law  of  supply  and  demand.  It  is  necessary  to  a  just 
comparison  of  the  gas  manager 's  ability  in  different  cities  and 
towns.  It  is  necessary  to  a  conservative  consideration  of 
the  expansion  of  existing  gas  works.  It  is  necessary  to  fix 
the  capacity  of  new  gas  works  in  advance  of  their  construc- 
tion. 

Finally  no  variations  in  the  price  of  gas  can  be  wisely  and 
safely  made  without  using  the  sales  per  capita  for  the  basis 
of  computation. 

Fixing  exact  prices  is  a  common  error  of  inexpert  legisla- 
tors. Since  the  prices  of  raw  materials  and  productive  labor 
cannot  be  fixed  it  is  obviously  unjust  to  unalterably  fix  the 
price  of  gas. 

In  England  for  many  years  and  recently  in  Boston  a  just 
method  of  fixing  the  relative  price  of  gas  and  the  per  cent  of 
dividends  appears  to  have  been  found  in  the  use  of  The  Lon- 
don Sliding  Scale. 

Its  fairness  to  both  producer  and  consumers  of  gas  should 
recommend  its  use  in  all  cases  of  legislative  enactments 
fixing  the  price  of  gas,  and  tend  to  relieve  the  tension  o  the 
present  bitter  antagonism  of  the  public  and  he  public  utility 
corporations. 


CHAPTER  XVI. 
THE  LONDON  SLIDING  SCALE. 

This  chapter  was  written  in  1909  and  used  to  elucidate 
the  probable  results  of  Boston's  Sliding  Scale  just  then 
enacted  into  a  law. 

The  Boston  Consolidated  Gas  Company,  still  (1912)  has 
the  capitalization  of  $15,124,600  with  which  it  started  and 
is  paying  9  per  cent  dividends  with  the  price  of  gas  fixed 
at  80c.  per  thousand  with  total  gas  sales  of  4,990,691,000 
cu.  ft.  for  the  year  ending  June  30,  1912.  There  is  also  a 
scaled  reduction  in  price  for  fuel  gas  made  by  the  Boston 
Consolidated  Gas  Company. 

In  England  this  fuel  gas  rate  is  called  a  differential  rate 
and  here  a  stepped  rate. 

It  is  interesting  to  discover  how  accurately  Boston's 
gas  prices  have  followed  the  tabulation  deduced  for  them  in 
1909,  in  this  paper. 

It  is  important  to  clearly  understand  what  the  London 
Sliding  Scale  means,  and  that  it  is  based  upon  a  uniform 
price  to  all  consumers,  and  that  the  sliding  scale  concerns 
only  the  relation  between  the  uniform  price  of  gas  to  con- 
sumers, and  the  rate  of  dividends  to  stockholders. 

The  Boston  Consolidated  Gas  Company  has  added  a 
differential  rate  to  large  fuel  gas  users  which  reduces  the 
price  of  gas  to  them  below  80c.  per  1,000  cu.  ft.,  but  does 
not  affect  the  Boston  Sliding  Scale  dividends. 


228          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

Before  taking  up  the  mathematical  discussion  of  the 
London  sliding  scale,  it  should  be  understood  that  the 
English  method  of  issuing  corporate  stock  differs  widely 
from  the  American  method.  In  England,  gas  corporations 
make  separate  successive  issues  of  stocks,  each  issue  bearing 
a  separately  fixed  dividend,  and  it  is  the  practice  to  closely 
and  immediately  divide  up  all  profits  as  dividends,  and  to 
make  and  sell  by  public  auction,  new  issues  of  stock  for 
extensions,  or  additions  to,  the  working  plant,  when  and  as 
they  may  be  needed. 

From  a  usually  small  initial  issue  of  capital  stock  at 
10  per  cent  the  subsequent  issues  of  the  going  company  are 
reduced  to  dividends  of  7,  5,  4  or  3^  per  cent  as  capital  is 
required  for  expansions  of  business.  The  auction  sales  of 
these  stocks  usually  result  in  cash  premiums  and  these 
premiums  are  used  to  increase  the  capacity  of  the  works, 
thus  increasing  the  value  of  the  works  beyond  the  total  face 
value  of  the  securities  issued  without  increasing  the  require- 
ment for  dividends. 

The  10  per  cent  issues  of  stock  by  the  London  suburban 
companies  are  about  one-tenth  of  their  total  issues  at  pres- 
ent. By  reason  of  the  conversions  acts  the  three  Metro- 
politan companies  have  only  5,  4  and  3J^  per  cent  stocks  at 
present.  In  none  of  these  companies  does  the  price  of  gas 
exceed  $1,  and  its  price  averages  from  60  to  70c.  per  1,000 
cu.  ft. 

No  established  general  theory  of  the  sliding  scale  is 
stated  by  the  English,  and  oddly  enough,  the  only  explana- 
tion is  that  it  means  an  indefinite  division  of  extra  profits 
between  the  company  and  its  consumers ;  each  time  the  price 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          229 

of  gas  is  lowered  by  means  of  an  increased  dividend  on  stock 
for  each  penny  of  reduction  in  the  price  of  gas. 

For  10  per  cent  stock  this  is  usually  1/4  or  1/3  of  Iper  cent, 
and  for  issues  carrying  lower  dividend  rates  1/8  to  1/16  per 
cent.  This  results  in  giving  the  greater  share  of  any  reduc- 
tion in  price  to  the  consumer. 

A  strong  argument  in  favor  of  the  sliding  scale  is  the  fact 
that  companies  using  it  in  England  are  so  satisfactory  to 
the  public,  that  they  have  not  been  municipalized, 
although  municipal  ownership  has  become  exceedingly 
popular  in  that  country. 

In  obtaining  the  cash  value  of  public  utilities  the  usual 
method  followed  is : 

First.  To  obtain  an  average  of  the  net  divisible  income, 
which  also  must  be  shown  to  be  maintainable. 

Second.  To  compute  the  rate  of  interest  yielded  by  the 
capital  stock  by  comparing  its  average  market  price  with  its 
average  dividend. 

Third.  To  estimate  the  total  value  of  the  public  utility 
corporation's  property  by  capitalizing  the  net  divisible  in- 
come at  the  rate  of  interest  computed. 

This  gives  what  might  be  called  the  present  going  valua- 
tion of  the  corporation's  property  used  for  the  purpose  of 
purchasing  it  outright  and  converting  it  into  a  municipal 
enterprise. 

The  original  structural  cost  of  works  is  another  matter  as 
also  is  the  present  structural  value. 

Owing  to  premiums  received  from  auction  sales  of  stocks 
and  their  investment  in  plant,  the  capital  stock  of  most 
English  companies  is  less  than  their  actual  assets,  and  there 
is  comparatively  little  fluctuation  in  the  market  prices  in 


230          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

public  utility  stocks,  owing  to  the  complete  publicity  of 
every  detail  of  operation  required  by  law  and  custom.  In 
exceptional  cases  other  methods  of  valuation  have  been  used, 
but  under  ordinary  conditions  the  above  methods  appear 
to  be  generally  satisfactory. 

This  publicity  seems  to  prove  a  practical  and  effectual 
check  upon  criminally-minded  managers  by  preventing  any 
action,  or  failure  to  act,  which  would  prevent  any  man  from 
having  an  equal  opportunity,  to  use  his  own  judgment  as  to 
values  and  prices,  and  it  further  acts  to  steady  them. 

Capitalization  of  franchises  beyond  actual  cost  is  never 
claimed  or  practiced  in  England,  although  the  security 
arising  from  a  protected  monopoly  undoubtedly  increases 
the  market  value  of  public  service  corporations  stock  and 
thereby  usually  increases  greatly  the  present  going  valuation 
above  the  original  structural  cost  or  the  present  structural 
value. 

The  objection  of  Englishmen  to  over-capitalization  is 
very  strong,  and  enforced,  too. 

In  1903  The  Gas  Light  and  Coke  Co.  of  London,  was 
compelled  to  retire  $5,000,000  of  its  converted  capital 
stock,  paying  for  it  out  of  profits  divisible  under  the  sliding 
scale. 

In  England,  competition  between  public  service  corpora- 
tions is  no  longer  permitted  and  consequently  each  public 
utility  corporation  is  a  monopoly,  regulated  in  details  by  law, 
and  policed  by  publicity. 

The  annoyance  to  the  public  resulting  from  competing 
systems  in  the  streets  was  the  principal  cause  of  the  sup- 
pression of  competition,  although  the  unnecessary  duplica- 


PRACTICAL    BATE    MAKING   AND   APPRAISEMENT          231 

tion  of  cost  of  operating  plant  in  the  streets  is  an  equally 
good  reason  to  prevent  investments. 

As  a  concession  to  English  preference  for  low  dividend 
stocks,  Parliament  since  1887  has  permitted  companies 
having  high  dividend  stocks  to  convert  them  into  a  pro- 
rata  amount  of  lower  dividend  stocks.  A  share  of  the  10 
per  cent  stock  being  thus  replaced  by  two  shares  of  5  per 
cent  stock  with  proportional  increases  under  the  sliding 
scale,  and  similarly  with  other  rates.  Care  is  always  taken 
to  exclude  this  converted  stock  from  any  influence  upon 
future  possible  computation  of  the  present  going  valuation. 

The  entire  good  faith  of  all  the  dealings  of  Parliament 
with  the  gas  companies,  and  its  refusal  to  disturb  them  in  the 
enjoyment  of  franchises  and  contracts  unless  these  companies 
themselves  apply  for  additional  legislation,  has,  when  com- 
bined with  a  publicity  forcing  all  companies  to  sell  a  copy 
of  their  printed  annual  accounts  for  one  shilling  to  any  ap- 
plicant, made  English  gas  stocks  one  of  the  safest  and  most 
popular  investments  conceivable. 

Two  funds  are  usually  permitted  to  be  accumulated  by 
these  companies: 

The  insurance  fund  usually  is  5  per  cent  of  the  unconverted 
capitalization  and  obtained  by  withdrawing  from  the  annual 
profits  an  amount  equalling  1  per  cent  of  capital  each  year 
until  5  per  cent  is  reached. 

This  fund  is  carefully  guarded  and  is  used  by  permission 
of  court  officials  to  meet  any  extraordinary  claim,  demand, 
or  charge,  arising  from  accident,  strike  or  other  circum- 
stance, which  due  care  and  management  could  not  have 
prevented. 


232          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

The  reserve  or  dividend  fund  is  drawn  from  undivided 
profits  under  the  sliding  scale  and  is  not  usually  limited  in 
amount. 

It  is  intended  to  equalize  dividends  by  furnishing  suffi- 
cient in  lean  years  to  bring  dividends  up  to  their  usual 
amounts  and  therefore  in  its  accumulation  has  reduced  the 
possible  di video ds  of  good  years. 

From  4  to  7  per  cent  of  the  unconverted  capital  are  the 
amounts  carried  by  some  of  the  English  companies.  In 
some  of  the  earlier  legislation  10  per  cent  was  fixed  as  a 
maximum;  this  was  when  there  was  no  insurance  fund.  It 
is  the  intention  of  these  companies  to  cover  in  their  repairs 
accounts  all  forms  of  depreciation  such  as  physical  decay, 
inadequacy  and  obsolescence. 

The  universal  English  custom  of  covering  the  cost  of  all 
extensions  and  large  improvements  by  new  issues  of  capital, 
naturally  goes  with  the  immediate  division  of  each  year's 
profits  among  stockholders. 

Since  1898  Parliament  has  in  some  few  cases  allowed  from 
1  to  \y%  per  cent  of  a  company's  capitalization  to  be  taken 
from  annual  earnings,  to  create  a  renewal  (depreciation) 
fund  not  exceeding  a  total  of  10  per  cent  of  the  capitalization. 

Some  of  the  very  old  gas  companies  were  allowed  to  make 
fixed  dividends  on  cumulative  stock  issues,  and  as  these  are 
usually  large,  they  were  allowed  to  raise  the  price  of  gas,  if 
necessary,  to  earn  them;  these  companies  have  refrained,  if 
possible,  from  soliciting  further  legislation  from  Parlia- 
ment, as  that  would  open  the  door  to  the  sliding  scale  for 
them. 

The  maximum  price  of  gas  for  fixed  dividends  or  the  stan- 
dard price  for  the  sliding  scale,  appear  always  to  have  been 


PRACTICAL    RATE    MAKING   AND    APPRAISEMENT         233 

fixed  by  the  committees  charged  with  revision  of  a  company's 
affairs,  and  new  legislation  for  it,  slightly  in  excess  of  the 
price  required  to  obtain  the  fixed  or  the  standard  dividends. 

Parliament  in  1899  definitely  ignored  a  suggestion  of 
revision  of  the  affairs  of  gas  companies  and  the  fixation 
of  a  new  standard  price  for  gas  periodically.  The  sliding 
scale  appeared  to  it  to  have  operated  so  successfully  as  not 
to  require  a  readjustment  of  prices  by  an  outside  com- 
mission. 

However  able  and  conscientious  such  a  commission  may 
be,  it  is  necessarily  lacking  in  practical  knowledge  of  the 
gas  business,  and  may  in  dictating  fixed  prices,  which  do  not 
allow  the  necessary  elasticity  to  come  and  go  upon  with  the 
fluctuations  of  cost  of  raw  material  and  labor,  do  very 
great  injustice  to  either  the  gas  producers  or  the  gas  con- 
sumers of  a  company. 

This  appears  to  be  the  opinion  of  all  parties  in  England 
after  more  than  half  a  century  of  practical  experience  in 
legislating  for  gas  companies. 

Official  revision  and  fixing  of  prices  for  gas  by  a  com- 
mission at  stated  periods;  public  ownership  for  gas  com- 
panies; or  competition  in  the  sale  of  gas;  all  have  been 
abandoned,  so  far  as  possible,  for  the  use  of  the  sliding 
scale.  The  sliding  scale  with  its  elasticity,  and  its  compre- 
hensive advantages  to  both  producer  and  consumer  of  gas 
appears  to  have  proved  itself  by  34  years  of  use  to  be  the 
final  solution  of  the  problem  of  just  dealing  in  England. 

Doubtless  the  universal  satisfaction  felt  with  its  results 
arises  also  in  part  from  the  care  with  which  the  insurance 
funds,  the  reserve  (or  dividend)  funds,  and  the  later  de- 
preciation funds,  have  been  hedged  about  with  limitations 


234         PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

as  to  the  manner  of  their  creation  and  expenditure,  and 
limited  as  to  their  maximum  amounts,  and  further  checked 
by  the  publishing  to  all  the  world  of  the  annual  accounts  of 
the  operations  of  these  gas  companies. 

The  auction  clause  forcing  the  open  sale  of  all  new  issues 
of  stocks  subsequent  to  the  first  (or  10  per  cent)  issue,  re- 
duces the  company's  capitalization  required  for  expansions 
of  works,  since  the  very  large  premiums  usually  paid  are 
used  in  adding  to  the  plant,  but  do  not  require  to  be  covered 
by  profits  in  the  form  of  dividends.  Since  1877,  unless 
valid  objections  are  adduced,  the  auction  clause  has  been 
mandatory  in  all  English  gas  legislation. 

The  Utopian  miracle  of  the  universal  prosperity  of  gas 
companies  in  England;  of  companies  paying  10  to  15  per 
cent  dividends  on  first  issues  of  stock,  or  proportional  divi- 
dends on  these  stocks  after  conversion  into  lower  dividend 
stocks;  of  the  contented  consumers  of  these  companies 
receiving  and  paying  for  gas  at  prices  ranging  from  48c. 
(South  Metropolitan)  upwards,  and  in  some  cases  below 
this,  appears  to  have  been  wrought  by  the  sliding  scale. 
The  companies  not  having  the  sliding  scale  appear  to  have 
been  forced  to  the  greater  economies  resulting  from  their 
use  in  the  sliding  scale  companies. 

FACTORS  OF  THE  LONDON  STANDARD  SLIDING  SCALE. 

For  new  companies,  the  standard  price  per  1,000  cu.  ft. 
of  gas  of  a  given  candle  power  appears  to  be  fixed  at  from 
2c.  to  6c.  above  the  cost  of  the  gas  delivered  at  the  con- 
sumer's meter  plus  a  dividend  of  10  per  cent  on  the  invest- 
ment required  per  1,000  cu.  ft.  of  annual  sales. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          235 

This  cost  consists,  as  a  matter  of  common  consent,  of 
the  various  factors  given  in  Field's  Analysis,  and  is  care- 
fully presented  by  gas  experts  to  the  Parliamentary  com- 
mittee. 

The  standard  dividend  on  first  issues  of  stock  is  10  per 
cent  cumulative.  Of  late  years  this  standard  dividend  of 
10  per  cent  has  been  changed  in  some  instances  to  other 
issues  of  7  and  5  per  cent  stock. 

By  the  conversions  act  already  explained,  many  companies 
have  substituted  larger  amounts  of  lower  dividend  bearing 
issues  for  their  original  10  per  cent  issue. 

The  standard  ratio  between  the  variations  in  the  price 
of  gas  per  1,000  cu.  ft.  and  the  variations  in  dividends  paid, 
was  formerly,  for  each  penny  change  in  price  of  gas,  one- 
quarter  of  one  per  cent  change  in  dividend  on  10  per  cent, 
and  afterwards  on  7  and  5  per  cent  stocks;  thus  the  dividend 
increased  as  the  price  of  gas  decreased,  or  vice  versa.  This 
one-quarter  of  one  per  cent,  in  1900  and  subsequently,  has 
at  times  been  changed  to  one-third  of  one  per  cent  and  the 
standard  price  of  gas  has  been  somewhat  reduced  with  it. 

These  ratios  were,  and  are  now,  empirical  relations  fixed 
arbitrarily,  and  so  long  as  the  price  collected  by  the  company 
was  close  to  the  standard  price,  they  appeared  to  content 
the  companies,  but  the  companies'  constant  successes  in 
reducing  capital  expenditures  and  in  increasing  sales,  has 
operated  to  give  almost  all  of  any  reduction  in  cost  to  the 
consumer,  so  that  in  some  extreme  cases  the  company  has 
received  for  dividends  one-eighth  and  the  consumer  has 
saved  seven-eighths  of  the  reduction  in  the  cost  of  gas 
(cost  is  not  price). 


236          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

The  representatives  of  the  gas  companies  naturally  have 
complained,  that  as  a  fact  there  was  no  incentive  left  to 
reduce  prices,  and  have  desired  so  to  modify  the  existing 
sliding  scale  as  to  divide  more  nearly  equal  sums  between 
producers  and  consumers  of  gas. 

As  will  hereafter  be  shown,  this  could  have  easily  been 
accomplished  by  computing  the  fraction  of  one  per  cent 
to  be  added  for  each  reduction  of  price  (or  one-half  the 
reduction  in  cost),  but  no  one  appears  to  have  mentioned 
this  fact,  or  to  have  solved  this  problem  generally  and 
exactly. 

The  neutral  zone  in  the  sliding  scale  is  an  excess  or  reduc- 
tion usually  not  exceeding  6c.  variation  from  the  standard 
price  within  which  a  change  of  price,  up  or  down,  does  not 
require  a  change  of  the  standard  dividend.  Its  use  appears 
to  have  arisen  from  an  overabundance  of  precaution  which 
has  not  proved  necessary. 

All  comparisons  between  the  maximum  dividend  (10  per 
cent)  and  sliding  scale  gas  companies,  show  greater  reduc- 
tions of  price  of  gas,  and  greater  increase  of  dividends,  to 
have  resulted  from  the  sliding  scale. 

The  opinion  of  English  gas  engineers  appears  to  be, 
that  most  of  the  exceptional  trouble  with  the  Gas  Light 
and  Coke  Co.,  London,  has  arisen  from  its  indiscretion 
in  too  hastily  reducing  prices,  in  order  to  obtain  increased 
dividends. 

The  sliding  scale  is  not  a  substitute  for  good  management, 
it  only  adequately  rewards  it. 

Meter  rents,  discounts  on  price  to  large  consumers  of  fuel 
gas  for  heat  or  power,  etc.,  are  not  allowed  to  affect  the 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          237 

nominal  price  of  gas  to  the  ordinary  consumer,  which  is 
used  in  the  sliding  scale. 

Profit  sharing  with  employes  based  on  the  sliding  scale, 
sales  of  the  company's  stock  to  them  and  to  consumers, 
and  beneficial  funds  of  all  sorts  have  followed  this  prosperity 
due  to  the  sliding  scale.  These  are  separate  problems,  whose 
consideration  is  not  necessary  to  a  review  of  the  sliding 
scale 's  principles. 

GENERAL  THEORY  OF  THE  SLIDING  SCALE. 

For  conciseness  sake  algebraic  formulas  will  have  to  be 
used  to  a  small  extent  in  this  (hitherto  avoided)  attempt  to 
give  a  comprehensive  and  rational  and  practical  theory  of 
this  scale.  American  data  will  be  used  in  applying  it  practi- 
cally. The  following  theses  appear  to  be  commercially 
correct : 

Cities  of  over  75,000  population  have  larger  annual  sales 
of  gas  per  capita  (regardless  of  minor  variations  in  price) 
than  towns  and  villages  below  75,000  population.  In  all 
cases  a  reduction  of  the  price  of  gas  is  followed  by  increase 
in  the  sales  and  revenue  per  capita. 

In  all  cases,  at  a  fixed  price  for  gas,  there  is  an  annual  in-r 
crease  of  sales  per  capita  due  to  the  development  of  new 
methods  of  using  gas,  until  a  point  is  reached  where  further 
increase  of  sales  per  capita  stops  until  a  reduction  of  this 
fixed  price  is  made. 

Using  the  data  obtainable  from  the  annual  reports  of  the 
Massachusetts  Gas  and  Electric  Light  Commission,  we 
obtain  the  following  averages: 


238 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 


RELATION  OF  GAS  PRICE  TO  PER  CAPITA  SALES. 

See  Chapter  XV 
For  towns  less  than  75,000  population. 


Price  of  gas 
per  1,000  cu.  ft. 
For  the  year  1901 

$2.25 


00 
75 
50 
25 


1.00 

For  the  year  1907 
$2.00 
1.75 
1.50 
1.25 
1.00 


Annual 

sales  per 

capita 

cu.  ft. 

283 

584 

843 

1,187 

1,669 

2,393 

cu.  ft. 

722 

898 

1,395 

2,535 

3,824 


Gross 

revenue 

per  capita 

$0.86 
1.17 
1.48 
1.78 
2.09 
2.39 


$1.44 
1.57 
2.09 
3.17 

3.82 


One  dollar  gas  has  increased  its  sales  per  capita  by  1,431 
cu.  ft.  in  six  years,  or  about  240  cu.  ft.  per  year. 

In  1907  the  reduction  of  price  from  $1.25  to  $1  increased 
annual  sales  per  capita  1,289  cu.  ft.  or  about  50  cu.  ft.  for 
each  cent  reduction  of  price.  These  averages  from  about 
60  gas  companies  prove  conclusively  the  invariable  increase 
of  the  revenue  per  capita  following  each  reduction  in  price 
in  a  period  of  about  one  year. 

For  cities  over  75,000  population,  excluding  Boston  but 
including  eight  cities  with  prices  ranging  from  98c.  to  84c., 
the  average  annual  sales  per  capita  is  4,330  cu.  ft.  and  the 
average  increase  of  this  for  one  cent  reduction  in  price 
appears  to  be  about  40  cu.  ft. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          239 

In  obtaining  this  latter  quantity  periods  ranging  from  one 
to  six  years  and  reductions  of  price  ranging  from  4c.  to 
15c.  have  been  used,  no  tentative  selection  of  data  having 
been  made.  The  range  of  gain  per  capita  appears  to  be 
from  15  to  55  cu.  ft.  for  Ic.  reduction  in  the  price  of  gas. 

Some  of  the  cities  used,  having  been  but  slightly  in  excess 
of  75,000  population,  the  annual  sales  per  capita  (4,330 
cu.  ft.)  is  rather  too  low. 

From  these  results  we  can  state  the  following  formula  for 
the  average  total  gain  in  sales  resulting  from  a  reduction  in 
the  price  of  gas  and  the  lapse  of  time,  in  similarly  situated 
cities.  Let 

r  =  reduction  per  1,000  cu.  ft.  in  cents  of  price  of  gas. 
P  =  population  served. 
y  =  number  of  years  considered. 
Z  =  total  increase  of  sales  in  thousands.     Then 
(240  +40r)  yP 


1,000 

That  is,  add  240  to  40  times  the  reduction  of  price  in 
cents,  multiply  it  successively  by  the  years  and  population 
and  divide  by  1,000.  The  result  will  be  the  probable 
average  increase  of  total  sales  in  thousands. 

Before  formulating  the  first  or  starting  equation  of  con- 
dition of  the  sliding  scale,  it  is  necessary  to  decide  upon  the 
valuation  of  the  gas  works  to  be  used  as  a  basis  of  com- 
putation. This  may  be  determined  to  be 

1.  The  capitalization  of  the  company  in  stock. 

2.  The  present  going  valuation  as  stated  above  (market 
value)  . 


240          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

3.  The  present  structural  value   (actual  or  reproduction 
depreciated) . 

4.  The  original  structural  cost  to  date  less  depreciation 
(excluding  appreciation  of  land). 

Judge  Hough  of  the  United  States  Circuit  Court  decided 
upon  the  third  valuation. 

Precedents  in  England  appear  to  sustain  honest  capital- 
ization as  to  this  basis  for  dividends  under  the  sliding  scale. 

The  second  valuation  has  been  principally  used  in  the 
outright  purchase  of  public  utilities  by  English  munici- 
palities. Acceptance  of  these  English  views  will  finally  be 
found  to  be  most  beneficial  to  the  companies  themselves 
when  under  the  sliding  scale. 

The  average  cost  of  gas  per  1,000  cu.  ft.  delivered  should 
be  determined  from  that  series  of  years  of  operations  most 
nearly  fulfilling  future  conditions  of  gas  making  as  to  cost 
of  productive  labor  and  raw  materials  at  a  given  candle  power. 

To  the  bare  cost  of  gas  thus  found  is  usually  added  from 
2c.  to  6c.  per  1,000  cu.  ft.  to  allow  room  to  come  and  go  upon 
in  the  operation  of  works. 

The  standard  price  of  gas  per  1,000  cu.  ft.  delivered  at  the 
consumer's  meter  is  reached  by  adding  to  these  two  quan- 
tities a  sufficient  amount  to  provide  a  standard  dividend 
upon  the  valuation  of  the  investment  required  for  each 
1,000  cu.  ft.  of  annual  sales. 

THE  FIRST  OR  STARTING  EQUATION  OF  CONDITION. 

C  =the  total  valuation  of  works  or  plant  in  cents, 
p  =the  standard  (or  initial)  price  of  gas  per  1,000  cu.  ft. 
in  cents. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          241 

c  =the  agreed  cost  of  gas  per  1,000  cu.  ft.  delivered  in 

cents. 

a  =the  agreed  standard  dividend  (per  cent). 
S  =the  total  annual  sales  in  thousands. 


00 

That  is,  the  standard  dividend  upon  the  valuation  required 
by  1,000  cu.  ft.  of  sales  equals  the  difference  between  the 
price  and  cost  of  gas  delivered. 

Note  above  that  it  is  usual  to  permit  a  small  excess  for  the 
latter  quantity  (p  —  c). 

At  the  time  of  the  acceptance  of  the  sliding  scale  by  the 
Boston  Consolidated  Gas  Co.  its  data  were  as  follows: 

C  =$15,000,000;  8=3,000,000  thousands;  c  =  56c.,  and 
p  =90c.;  a  =7  per  cent  and  one-fifth  of  one  per  cent  increased 
dividend  was  allowed  to  it  for  each  cent  reduction  in  the 
price  of  gas  per  1,000  cu.  ft.  From  this  data  we  have 


p—  c=90—  56=34c. 

This  company  has  since  reduced  the  price  of  gas  to  85c. 
and  then  80c.,  greatly  increasing  its  sales  without  increasing 
its  capitalization,  and  has  been  able  to  pay  an  8  per  cent 
dividend  without  reducing  the  cost  of  gas  appreciably,  as 
will  presently  be  shown. 

SECOND  OR  GENERAL  EQUATION  OF  THE  DIVIDING  SCALE. 

r  =the  reduction  in  price  of  gas  per  1,000  cu.  ft.  in  cents. 

x  =the  per  cent  increase  of  dividend  for  a  reduction  of 
Ic.  in  price  to  divide  equally  the  saving  in  cost  of 
gas,  or  in  the  reduction  of  investment,  per  1,000 
cu.  ft.  sold. 


242          PEACTICAL    RATE    MAKING    AND    APPRAISEMENT 

B  =  total  cost  in  cents  of  extensions  or  additions  to  capital 

required  to  meet  increase  of  total  sales,  Z. 
We  must  write  this  equation  as  follows : 

(C+B)        (a+rx) 
(S+Z)        TOO" 

That  is,  the  increased  dividend  upon  the  new  valuation  of 
investment  required  by  1,000  cu.  ft.  of  sales  must  equal  the 
reduced  price  of  gas  (p — r)  less  the  cost  of  gas  (c)  delivered 
to  the  consumer's  meter. 

If  in  this  equation  we  place  the  condition  that  the  reduc- 
tion of  price  (r)  to  the  consumer  shall  equal  the  increase  of 
dividend 

(C+B)         rx 
(S  +Z)        100 

we  share  the  saving  in  cost  of  gas  equally  and  have 

(C+B)         rx 
(S  +Z)         100 

100       =100  (S+Z) 
"  (C+B)    "      (C  +B) 
IS  +Z) 

That  is,  the  fraction  of  one  per  cent  (x)  by  which  the 
dividend  must  be  increased,  for  each  Ic.  reduction  in  the 
price  of  gas  is  the  reciprocal  of  the  investment  required  by 
one  annual  1,000  cu.  ft.  of  sales. 

Thus,  in  Boston,  when  gas  was  at  85c.,  we  had 

C  +B          q,o  C7 
— — -=—  =$d.£>/ 

o  +L 
and  x  =0.28  of  one  per  cent  increase  dividend  for  each  cent. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          243 

By  legislation  it  was  fixed  at  one-fifth  (or  0.20)  of  one  per 
cent,  although  the  natural  conditions  produced  0.28  of 
one  per  cent  for  an  equal  division. 

But  this  fixing  the  value  of  x  also  fixed  the  corresponding 
value  of  r  (the  reduction  in  price)  and  substituting  x  in  the 
general  equation  we  obtain 


X 


(S  +Z)     ^  100 

r  —  r» 


That  is,  the  reduction  in  price  (r)  giving  equal  shares  of 
reduction  in  cost  to  consumer  and  producer  is  one-half  the 
standard  manufacturing  profit  (p  —  c),  less  one-half  the 
standard  dividend  on  the  investment  required  by  one  annual 
1,000  cu.  ft.  sales. 

For  Boston  this  would  correctly  be 

r  =17  —  12.5  =4}/£c.  reduction  and 
p  —  r  =  85J^  cents  price  of  gas. 


The  dividend  should  have  been 

(a  +rx)  =7+1.26  =8.26  per  cent  dividend. 

So  far  the  Boston  sliding  scale  gives  close  results  for  total 
annual  sales  of  4,233,256  thousands.  About  5,600,000 
thousands  appear  to  be  the  practical  limit  of  Boston's 
annual  sales  in  the  near  future.  It  is  further  assumable  that 
this  demand  can  be  met  without  increasing  the  present 
capitalization  of  $15,000,000  fixed  by  the  legislature. 

Further  it  is  to  be  reasonably  expected  that  the  manufac- 
turing cost  of  gas,  at  present  56c.,  will  be  reduced  in  suc- 
cessive steps  to  51,  46  and  41c.,  and  that  the  price  at  present, 


244          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

80c.,  will  be  reduced  to  75c.     With  the  cost  of  gas  at  56c. 
we  have 

/-i  .  -p 

0     „    =$2.67  investment  per  annual  1,000  cu.  ft.  sales. 


100 
x  =-        =0.375  of  1  per  cent  for  each  cent. 


r  =—  —  ^  —  —  =7.6c,  reduction  in  price. 

(a+rx)  =7  +2.85  =9.85  per  cent  dividend. 
(p  —  r)  =82.4c.  =the  price  of  gas. 

With  the  cost  of  gas  51c.  and  no  other  change 

x  =0.375  of  one  per  cent  increase  of  dividend  for  each  cent. 

on  _  10    n 

r  =—  -  =10.1  reduction  in  price. 


(a  +rx)  =7  +3%  =10%  per  cent  dividend. 

(p  —  r)  =79.9c.  price  of  gas. 

With  the  cost  of  gas  46c.  and  no  other  change 

r  =  44—18.7  =12>6c<  reduction  of  price. 

(a  +rx)  =7  +4.7  =11.7  per  cent  dividend. 
(p  —  r)  =77.4c.  price  of  gas. 
With  the  cost  of  gas  41c.  and  no  other  change 

r  =_i  HI  —  11  =15.1c.  reduction  of  price. 

2i 

(a  +rx)  =7  +5.6  =12.6  per  cent  dividend. 
(p  —  r)  =74.9c.  price  of  gas. 

It  will  be  instructive  to  follow  the  division  of  the  proceeds 
of  the'sale  of  one  1,000  cu.  ft.  of  gas  according  to  each  scale. 


PRACTICAL  RATE  MAKING  AND  APPRAISEMENT       245 

RELATION  OF  PRICE  TO  DIVIDENDS. 

Boston's  Sliding  Scale. 
Unequal  division  of  proceeds  of  sale  of  1,000  cu.  ft.  of  gas. 


Price  of 

gas, 

Consum- 
er saves, 

M'f'g 
cost, 

Dividends  to                        Approximate 
stockholders         Surplus        sales  in 

c. 

c. 

c. 

c. 

Per  cent 

c.         1,000  cu.  ft. 

90 

0 

56 

35 

7%  of  $5.00 

—  1 

3,000,000 

85 

5 

56 

29.5 

8%  "  3.57 

-y* 

4,233,256 

80 

10 

56 

24 

9%  «  2.67 

0 

5,600,000 

80 

10 

51 

24 

9%  "  2.67 

+  5 

5,600,000 

80 

10 

46 

24 

9%  "  2.67 

+10 

5,600,000 

80 

10 

41 

24 

9%  "  2.67 

+15 

5,600,000 

75 

15 

46 

27 

10%  "2.67 

+  2 

5,600,000 

75 

15 

41 

27 

10%  "  2.67 

+  7 

5,600,000 

Marks'  Dividing  Scale. 

Equal  division  of  proceeds  of  sale  of  1,000  cu.  ft.  of  gas 

(same  data). 


Price 

Consum- 

M'f'g 

Dividends  to 

Approximate 

of  ga 

is    er  saves, 

cost 

stockholders 

Surplus 

sales  in 

c. 

c. 

c. 

c. 

Per  cent 

c. 

1,000  cu.  ft. 

90 

0 

56 

35 

7%        of 

$5. 

00 

—  1 

3,000,000 

85 

.5 

4. 

5 

56 

29. 

5 

8.25%  " 

3. 

57 

0 

4,233,256 

82 

.4 

7. 

6 

56 

26. 

3 

9.85%  « 

2. 

67 

0 

5,600,000 

79 

.9 

10. 

1 

51 

28. 

7 

10.75%  " 

2. 

67 

0 

5,600,000 

77 

.4 

12. 

6 

46 

31. 

2 

11.7%     « 

2. 

67 

0 

5,600,000 

74 

.9 

15. 

1 

41 

33. 

6 

12.6%     " 

2. 

67 

0 

5,600,000 

Consideration  of  these  two  tables  reveals  at  once  the 
grave  defects  due  to  the  superficiality  and  rigidity  of  the 
London  and  Boston  sliding  scale  for  gas,  when  the  reduced 
price  of  gas  departs  a  little  way  from  the  standard  price. 

If  the  various  funds,  such  as  the  ''insurance/'  " reserve" 
and  " depreciation,"  are  full,  there  is  no  other  honest  method 
of  disposing  of  the  surplus  than  to  reduce  the  price  of  gas 
without  causing  the  company  to  receive  an  equal  share  of 


246          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

this  reduction  to  the  consumer,  which  latter  individual  gets 
nearly  all  the  benefit  of  the  reduction. 

These  defects  are  cured  in  the  Marks'  dividing  scale, 
which  can  be  applied  to  every  conceivable  case  because  it 
embodies  all  the  factors  naturally  operating  upon  the 
finances  of  gas  works. 

In  it  the  computed  fraction  of  one  per  cent  added  to 
dividend  for  each  reduction  of  Ic.  in  the  price  of  gas  must  be 
the  reciprocal  of  the  capital  stock  invested  for  the  sale  of 
1,000  cu.  ft.  of  gas  during  the  current  year. 

In  it  the  computed  reduction  in  the  price  of  gas  must  be 
one-half  the  difference  between  the  standard  price  profit  on 
1,000  cu.  ft.  of  gas  and  the  amount  of  the  standard  per- 
centage of  the  capital  stock  invested  for  the  sale  of  1,000 
cu.  ft.  of  gas  during  the  current  year. 

The  equitable  dividend  giving  equal  shares  to  stockholders 
and  consumer,  is  the  total  sum  of  the  standard  dividend 
and  of  the  product  of  the  reduction  in  price  by  the  computed 
fraction  of  one  per  cent  allowed  for  each  Ic.  reduction  in 
price  per  -1,000  cu.  ft. 

It  would  be  hard  to  overestimate  the  colossal  sums  of 
money  invested  and  disbursed  since  1875  under  the  benignant 
guidance  of  the  London  sliding  scale;  they  are  amazing,, 
overwhelming. 

The  division  of  the  vast  profits  from  gas  at  the  extreme  of 
this  scale  is  so  unfair  to  the  companies  as  to  have  caused 
much  dissatisfaction  to  and  complaint  by  the  gas  engineers- 
whose  skill  and  honest  efforts  have  enabled  the  present 
exceedingly  low  cost  and  price  of  gas,  and  great  profits,  in 
England. 

Since  1875  committees  of  Parliament,  the  London  board. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          247 

of  trade,  gas  engineers  and  accountants,  and  lawyers  and 
experts,  have  all  sought  to  amend  this  defect  involving 
millions  of  pounds  sterling,  but  the  complete  answer  to  this 
stupendous  problem  in  equity  appears  to  have  ever  eluded 
their  grasp. 

My  own  efforts  have  been  to  completely  state,  explain 
and  exemplify  this  problem,  and  I  hope  I  have  cleared  up 
this  tangled  situation,  reaching  an  equitable  and  universal 
dividing  scale. 

There  is  but  one  right  way  to  do  this  thing,  and  there  are 
countless  wrong  ways,  many  of  which  are  even  now  being 
tried  without  complete  satisfaction  to  either  party. 

In  adapting  the  London  sliding  scale  for  gas  to  local  con- 
ditions Boston  has  made  a  long  step  in  the  right  direction, 
following  a  conservative  and  tested  lead,  but  instead  of  using 
the  fixed  fraction  one-fifth  of  one  per  cent  for  the  increment 
of  dividend  for  each  Ic.  reduction  in  the  price  of  gas,  it 
should  have  made  this  increment  the  reciprocal  of  the 
capitalization  required  for  each  1,000  cu.  ft.  of  annual 
sales,  and  if  great  precision  is  required,  also  fixed  the  allow- 
able reduction  in  price  at  one-half  the  standard  price,  less 
one-half  the  sum  resulting  from  adding  the  cost  of  gas  to 
the  amount  of  the  standard  dividend  on  the  capitalization 
required  for  each  1,000  cu.  ft.  of  annual  sales. 

Thus  the  first  American  example  of  the  use  of  the  sliding 
scale  for  gas  would  have  established  comprehensively  and 
universally  for  all  cases,  the  equitable  adjustment  of  its 
factors. 

The  triumphant  progress  of  the  sliding  scale  in  England 
will  be  repeated  in  America,  and  the  future  interests  con- 
trolled by  it  will  be  far  greater,  therefore  the  dividing  scale 


248          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

should  be  without  flaws  in  theory  and  judicially  fair  in  its 
practical  operation. 

MARKS'  DIVIDING  SCALE. 

As  the  object  of  this  research  of  mine  was  to  discover  a 
mathematically  correct  and  universally  applicable  relation 
between  all  the  factors  affected  in  a  division  of  surplus  sav- 
ings or  surplus  profits,  I  would  suggest  the  use  of  the  term 
" Marks'  dividing  scale"  as  indicating  a  method  by  which 
equal  shares  can  be  allotted  to  producer  and  consumer  in 
every  known  form  of  selling. 

It  is  interesting  to  note  the  ease  with  which  it  can  be 
applied  to  all  businesses. 

For  instance,  the  recent  thorough  overhauling  of  the 
Cleveland  electric  railways  gives  us  the  following  data  very 
nearly : 

Actual  cost  of  one  passenger,  3c. 

Passengers  (1907),  135,000,000. 

Final  valuation  of  all  Cleveland's  electric  railways, 
$23,909,731,  or  about  18c.  per  passenger. 

It  has  been  suggested  that  the  railway  company  be  limited 
to  6  per  cent  dividends  and  the  fares  scaled  down  as  econ- 
omies permit,  so  as  to  never  make  more  profit. 

Would  it  not  have  been  better  to  have  agreed  upon  a 
standard  4c.  fare  and  a  standard  5  per  cent  profit  and  used 
" Marks'  dividing  scale"  of  profits. 

We  would  have  then  5  per  cent  of  18c.  =0.9c.,  and  4 — 3 
=  lc.,  which  is  very  nearly  equality. 

100 
The  increment  for  Ic.  reduction  would  have  been 

lo 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          249 

=6  per  cent  very  nearly,  and  the  result  attained  by  the 
company  as  soon  as  it  could  possibly  and  safely  reach  it 
would  have  been  11  per  cent  dividends  and  3c.  fares. 

It  is  quite  sure  that  by  means  of  tickets  it  would  not  be 
long  before  this  railway  company  would  have  reduced  its  4c. 
fare  somewhat  and  increased  its  5  per  cent  dividend  as  far 
as  it  could. 

Of  course,  these  figures  are  only  roughly  illustrative  of 
the  adaptability  of  this  formula  for  ''Marks'  dividing 
scale." 

The  most  careful  and  exhaustive  investigation  must  pre- 
cede every  application  of  this  scale. 

Whenever  a  specialty  is  sold ;  as  passenger  miles,  ton  miles, 
car  miles,  cubic  feet  of  water,  telephone  messages,  tele- 
grams, K.W.H.,  arc  lights,  etc.;  this  "dividing  scale"  will 
work  as  beneficently  as  has  the  London  scale,  already  oper- 
ated for  34  years  on  gas  in  England. 

The  division  of  surplus  savings  with  the  employes  of  the 
gas  company  can  be  arranged  in  almost  any  proportions 
desired. 

For  instance,  for  any  selected  year,  let 

S  =  total  annual  sales  of  gas. 

p  =  standard  price  of  gas  per  1,000  cu.  ft. 

O  =  total  operating  cost  for  one  year. 

F  =  total  preferred  interest  or  dividend  charges. 

E  =  total  standard  dividend  on  stock. 

D  =  divisible  surplus  saving.     Then 

D=Sp— (0+F+E) 

If  we  decide  that  the  divisible  surplus  savings  should  be 
shared  equally  by  the  consumers,  the  stockholders  and  the 
employes,  the  amounts  would  be  D-4-3  to  each. 


250          PKACTICAL    RATE    MAKING    AND    APPRAISEMENT 

This  amount,  if  divided  by  the  total  annual  sales,  would 
give  the  drop  from  the  standard  price  per  1,000  cu.  ft.  of 
gas.  D-3  S. 

If  this  amount  is  divided  by  the  total  stock,  we  obtain  the 
total  increment  of  the  dividing  scale  stock  to  be  added  to 
the  standard  dividend  fixed. 

The  remaining  one-third  of  the  total  divisible  surplus 
saving  can  be  apportioned  to  the  employes,  or  for  their 
benefit  in  the  form  of  life  or  accident  insurance,  pensions, 
or  extra  pay,  as  may  be  deemed  suitable  to  their  needs. 

Dividing  the  divisible  surplus  savings  into  3  equal  parts 
appears  to  me  to  be  fair  dealing  with  the  parties  to  the 
tripartite  relation,  but  others  may  think  differently  and 
agree  on  a  different  divisor. 

Changing  the  divisor  from  2  affects  the  fundamental  or 
general  equation  stated  in  the  case  of  the  London  sliding 
scale,  in  which  an  equal  division  of  the  divisible  surplus 
saving  per  1,000  cu.  ft.  is  assumed  as  between  stockholders 
and  consumers. 

Rewriting   this   equation   for   3   equal    shares,   we   have 

C+B 


for  m 


S+Z 


(a+rx\  0 

-Too-)  =P-o-2r 


in  which  the  divisible  surplus  savings  is  represented  by  3r 
and  from  the  standard  price  (p),  in  addition  to  the  cost  of 
gas  (e),  is  taken  2r,  covering  one  allotment  to  reduce  the 
price  of  gas,  besides  an  equal  one  for  distribution  among 
employes. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          251 

We  have  x  =  100  H-m  on  the  condition  of  equality  of  surplus 
dividends  and  of  reduction  in  price  of  gas,  and  by  trans- 
formation after  substitution 

p — c — 0.01  a  m 
~3~ 

That  is  the  reduction  in  price  per  1,000  cu.  ft.,  giving  three 
equal  shares,  as  apportioned  above,  is  one-third  of  the  stan- 
dard price,  less  the  cost  and  also  less  the  standard  dividend 
for  1,000  cu.  ft. 

A  liberal  interest  in  savings  for  all  trustworthy  employes 
appears  to  be  just  and  should  not  diminish  the  results  shared 
by  others. 


CHAPTER  XVII. 

CAPITALIZATION,    ASSETS    AND    PROFITS    OF    MASSACHU- 
SETTS GAS  COMPANIES. 

In  previous  considerations  of  the  "Sales  Per  Capita" 
and  of  the  " London  Sliding  Scale"  for  gas  companies  in 
the  search  for  a  universal  and  equitable  dividing  scale,  it 
has  been  necessary  to  divide  the  Massachusetts  gas  com- 
panies into  two  groups. 

The  first  group  includes  all  companies  in  towns  less  than 
75,000  population. 

The  second  group  includes  companies  in  cities  over  75,000. 
population. 

The  first  group  has  further  been  sub-divided  into  five 
groups  approximating  the  prices  of  $2,  $1.75,  $1.50,  $1.25 
and  $1  per  1,000  cu.  ft.  of  sales. 

Unless  this  segregation  of  precedents  is  made,  the  averages 
deduced  will  surely  mislead  when  used  for  the  general  pur- 
pose of  estimating  the  cost  of  gas  works. 

Heretofore  it  has  been  shown  that  there  is  a  law  rudely 
connecting  the  selling  price  of  gas  with  its  sales  per  capita 
and  it  will  also  be  found  that  there  is  a  general  relation 
existing  between  the  selling  price  and  the  investment  per 
1,000  cu.  ft.  of  annual  sales  of  gas  works. 

For  the  proper  use  of  an  equitable  and  universal  dividing 
scale,  it  is  imperative  that  the  true  average  structural  cost 
of  gas  works  per  1,000  cu.  ft.  of  annual  sales  should  be  learned 
from  honest  practical  precedents. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          253 

The  malign  results  of  unregulated  competition,  over- 
capitalization, and  inexpert  legislation,  is  nowhere  better 
shown  than  in  Boston,  whose  gas  works  will  necessarily  be 
excluded  as  a  precedent  of  value  in  estimating,  capitaliza- 
tion, assets  and  profits. 

In  1907  the  Boston  Consolidated  Gas  Co.  purchased 
2,261,945  1,000  cu.  ft.  of  gas  of  the  New  England  Gas  & 
Coke  Co.;  it  sold  4,215,472  1,000  cu.  ft.,  manufacturing  the 
difference  with  a  gas  works  rated  by  its  own  officials  at 
9,725  1,000  cu.  ft.  daily,  multiplied  by  200,  or  1,945,000 
1,000  cu.  ft.,  annual  capacity. 

The  State  Legislature  fixed  the  capital  of  this  company  at 
$15,126,000  or  $7.77  per  annual  1,000  cu.  ft.  of  capacity 
—1907  (capacity  is  not  sales). 

The  total  annual  sales  of  gas  when  this  legislation  was 
enacted  was  about  3,000,000  1,000  cu.  ft.,  and  the  basis  of 
Boston's  present  sliding  scale  was  7  per  cent  of  $5,  or  35c., 
standard  profit  on  each  1,000  cu.  ft.  of  gas  sold;  a  sum  nearly 
twice  as  large  as  should  have  been  permitted,  resulting  from 
excessive  capitalization,  granted  by  the  legislature. 

Segregating  the  various  groups  according  to  price  in  towns 
of  less  than  75,000  population,  we  have  the  following  series: 


254 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 


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PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          259 

Great  care  has  been  taken  to  eliminate  from  the  Massa- 
chusetts companies  used  obviously  abnormal  instances  and 
to  select  such  as  have  apparently  found  themselves  and 
settled  themselves  down  under  normal  conditions  undis- 
turbed by  too  serious  financial  vagaries,  or  the  introduction 
of  electric  lighting  adventures. 

Companies  purchasing  their  gas  are  omitted,  because  gas 
would  not  be  bought  except  at  lower  cost  than  it  could  be 
made. 

The  tax  value  of  these  companies  affords  a  valuable  check 
upon  the  capitalization  and  (bookkeeping)  assets. 

It  might  appear  from  these  tax  values  that  the  assets 
(capital)  had  often  been  very  greatly  impaired  unless  (as  a 
fact)  this  impression  be  corrected  by  the  market  value  of  the 
stock. 

The  rated  annual  capacity  of  these  works  is  compared  with 
the  annual  sales  in  each  case  and  frequently  serves  to  show 
how  closely  these  two  approach  in  the  more  profitable  works 
which  are  not  overbuilt. 

The  grouping  of  the  selected  gas  companies  according  to 
prices  of  gas,  was  on  the  assumption  that  having  naturally 
reached  a  given  price  the  fundamental  units  will  be  found  to 
be  close  to  each  other  and  yield  reliable  averages,  for  practi- 
cal use. 

The  inclusion  of  common  stock,  mortgage  bonds  and  short 
term  notes  in  the  units  of  capitalization  of  these  gas  com- 
panies, has  arisen  from  the  custom  of  the  companies,  which 
are  said  to  issue  these  short  term  notes  for  permanent 
improvements  and  then  apply  to  the  Massachusetts  Gas  and 
Electric  Light  Commission  for  permission  to  convert  the' 
notes  into  stock  or  bonds. 


260          PRACTICAL   RATE    MAKING    AND    APPRAISEMENT 

The  cost  of  gas  per  1,000  cu.  ft.  is  derived  from  the  total 
operating  expenses  less  the  income  from  residuals,  divided 
by  the  total  annual  sales. 

The  dividends  declared  are  noted;  they  are  usually  very 
much  less  than  the  manufacturing  profit  per  1,000  cu.  ft.  of 
gas. 

The  fairer  English  custom  is  to  rely  on  the  " insurance" 
and  "reserve"  funds  and  divide  up  the  manufacturing  profit 
very  closely  among  the  stockholders  providing  for  expansion 
of  works  by  new  issues  of  stock  sold  at  .public  auction. 

A  closer  comparison  of  the  results  of  the  various  groups 
will  give  a  better  grasp,  although  the  groups  covering  two  or 
less  cities  cannot  have  the  weight  of  the  larger  groups  as  to 
averages. 

The  prices,  costs  and  profits  on  gas  are  averages  of  averages 
and  not  of  totals  giving  each  town  of  each  group  equal  weights 
in  results. 

In  the  Metropolitan  group  the  $2.31  of  assets  per  1,000 
cu.  ft.  of  annual  capacity  and  the  $3.55  of  assets  per  1,000 
cu.  ft.  of  annual  sales  are  noteworthy,  as  the  averages  of 
Massachusetts  cities  not  exceeding  150,000  or  less  than 
75,000  population. 

Manhattan  Island,  New  York  City,  has  sales  of  more 
than  double  the  sales  of  all  Massachusetts.  Its  towering 
office  buildings,  hotels,  apartment  houses,  and  tenement 
districts  and  its  theatres  and  restaurants  with  its  densely 
congested  population  of  over  2,000,000  appears  to  make  it 
the  only  spot  where  less  than  $2  of  assets  per  1,000  cu.  ft. 
of  annual  sales  is  probable  with  its  works  driven  to  their 
utmost  capacity. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          261 


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262          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

Up  to  this  point  the  collective  capitalization  of  these 
Massachusetts  companies  has  been  dealt  with  as  if,  like 
ordinary  stock,  all  securities  were  dividend  bearing. 

If  there  are  preferential  charges  on  preferred  stock,  bonds, 
notes,  etc.,  these  charges  must  be  added  to  the  operating 
cost  of  gas  and  a  special  cost  of  gas  per  1,000  cu.  ft.  obtained 
to  use  with  the  special  dividing  scale  stock  capitalization 
per  1,000  cu.  ft.  of  sales. 

Conservatism  would  suggest  that  the  dividing  scale  stock 
issued  should  not  be  less  than  $2  per  annual  1 ,000  cu.  ft.  of 
sales,  for  an  increment  of  dividend  of  over  one-half  of  one 
per  cent  on  a  low  capitalization  per  1,000  cu.  ft.  sales,  might 
produce  dividing  scale  dividends  so  large  as  to  cause  public 
objection. 

Recognizing  the  risk  and  delays  in  all  new  ventures  the 
custom  in  England  is  to  allow  10  per  cent  dividends  (if 
earned)  on  the  first  issue  for  a  new  gas  company  and  this 
would  naturally  suggest  a  cumulative  10  per  cent  preferred 
sliding  scale  stock  for  all  new  company's  first  installment 
of  stock,  with  lower  rates  for  subsequent  installments,  as 
required  for  extensions. 

But  there  appears  to  be  no  idea  of  exaggerating  the  capital 
per  1,000  cu.  ft.  of  annual  sales  of  gas  in  England,  by  capital- 
izing franchises;  allowing  for  appreciation  in  the  value  of 
real  estate  used,  or  adding  to  the  gas  company's  cost  for  its 
distributing  system,  the  cost  of  pavements  (laid  at  the 
municipality 's  cost)  over  mains  and  services. 

In  the  recent  decision  of  the  United  States  Circuit  Court  in 
"the  80-cent  gas  case,"  its  action  was  contrary  to  all  English 
precedents  and  law.  Its  valuations  were  approximately 
as  follows,  when  separated: 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          263 

For  franchises  (a  gift) $12,000,000 

For  increased  value  real  estate 7,500,000 

For  pavements  over  mains  and  services 

paid  for  by  city,  etc 6,000,000 

$25,500,000 
Present  value  plant  (approx.) 33,500,000 


Total $59,000,000 

The  Master  appointed  even  wished  to  present  the  Con- 
solidated Gas  Co.  with  $20,000,000  for  its  franchises,  but  the 
court  thought  that  was  going  too  far. 

This  deplorable  blunder  of  the  court  appears  to  have 
been  the  result  of  entire  ignorance  of  English  law  and  pre- 
cedents and  of  the  actual  factors  of  cost  in  gas  works. 

It  emphasizes,  even  more  than  the  instance  of  the  capital- 
izing of  the  Boston  Consolidated  Gas  Co.  by  the  Massa- 
chusetts State  Legislature,  our  people's  and  our  honest 
corporations'  bitter  need  for  their  own  protection,  of  the 
rational  and  practical  methods  of  fair  dealing  with  public 
service  corporations,  so  clearly  established  and  practiced  in 
England. 

There  the  parliamentary  committees  have  the  facts  pre- 
sented to  them  by  parliamentary  guilds,  of  engineers,  ac- 
countants and  solicitors,  who,  making  a  specialty  of  this 
work,  have  an  intimate  knowledge  of  all  the  facts  and  pre- 
cedents of  the  case  under  consideration  and  of  the  principles 
established. 

Since  the  above  was  written  the  United  States  Supreme 
Court  has  overruled  the  Circuit  Court  and  dismissed  the 
bill  without  prejudice,  directing  the  Consolidated  Gas  Co. 
to  test  the  results  of  selling  gas  at  80c.  per  1,000  cu.  ft.  before 
again  resorting  to  the  courts. 


264          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

As  its  reasons  for  this  action  the  Supreme  Court  declared 
its  belief  that  the  value  of  the  plant  was  overestimated,  and 
that  gas  sales  would  increase  at  the  reduced  price  (80c.), 
yielding  a  profit  of  6  per  cent,  and  made  no  allowance  for 
value  of  franchises,  save  the  initial  amount  fixed  under  a 
special  law  of  New  York  (1884)  since  repealed. 

After  the  first  exploit  of  its  inexpert  legislators  in  the 
Boston  gas  case,  we  can  pardon  Massachusetts  citizens  for 
their  apprehensions  over  their  proposition  to  pass  a  general 
sliding  scale  law  for  gas  companies  in  that  state. 

To  test  out  this  universal  and  equitable  dividing  scale  the 
best  way  is  to  apply  it  practically  to  the  groups  of  companies 
mentioned. 

THE  METROPOLITAN  GROUP. 

In  this  group  the  data  is  as  follows: 

Total  common  stock $4,290,000 

Common  stock  per  1,000  cu.  ft.  sales. .  .     m  =$1.82 

This  is  a  special  valuation  of  m  in  cents  for  use  in  dividing 
scale  only. 

Preference  securities $680,880 

Five  per  cent  interest  on 34,044 

Interest  cost  per  1,000  cu.  ft.  sales 14c. 

Operating  cost  per  1,000  cu.  ft.  sales. . .  61c. 

Special  dividing  scale  cost  per  1,000 

cu.  ft.  sales 75c. 

Let  standard  price  be 90c. 

Let  standard  dividend  be  per  1,000 

cu.  ft.  sales 20c. 

per  1,000  cu.  ft.  sold,  or  11  per  cent  =a.  Then  we  have 

2r  =p — c —  —^  m  =  total  divisible  saving 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          265 

2r=— 5 

r  = — 2.5c.  or  increase  of  2.5c.  in  price, 
p — r  =90  -f  2.5c.  or  92J^c.  per  1,000  cu.  ft.  as  the  proper 
price. 

a  +—  =the  proper  dividend 
computed  11—  -|  x-^-  =11—1.4  =9.6% 


as  the  properly  permitted  dividend  rate  on  the  common 
stock  after  paying  5  per  cent  interest  on  the  preference 
securities. 

The  increment  of  the  standard  dividend  for  profits  is  —  , 

m 

but  when  the  standard  price  p  is  exceeded,  the  dividend 

vanishes  when  the  increase  of  price  =r  x  —  =a  or  when 

m 


That  is  to  say  for  the  figures  used  in  the  Metropolitan 
group  the  dividing  scale  ceases  to  be  useful  at  llOc.  price 
with  90c.  as  the  standard  price. 

If  the  operating  cost  of  gas,  c,  is  reduced  to  46c.  per  1,000 
cu.  ft.  in  the  above  group 

2r  =p  —  c  —  am  =10c.  saving 
r  =5c.  reduction 
p  —  r  =85c.  price  of  gas 

i  no 

a  +—  =11  4-5  X  -  =13.7  per  cent  dividend 
m  182 


266       PRACTICAL  RATE  MAKING  AND  APPRAISEMENT 

THE  $2  GROUP 

This  group  may  be  said  to  represent  the  first  venture  in  a 
small  town  selling  about  6,000,000  cu.  ft.  annually  and  re- 
quiring an  investment  of  about  $40,000. 

With  proper  expert  control  the  whole  of  this  investment 
should  not  be  required  at  once  or  the  operating  cost  of  gas 
be  greater  than  $1.50  per  1,000  cu.  ft.  sales. 

The  risk  and  delay  of  a  new  venture  might  be  covered  by 
a  first  issue  of  10  per  cent  cumulative  preferred  stock  with 
dividing  scale  dividend  increments — 

m  =$6.67  capital  per  1,000  cu.  ft.  annual  sales  might  be 
assumed  and 

Operating  cost  of  gas  per  1,000  cu.  ft $1 . 50 

Pref.  stock  cost  of  gas  per  1,000  cu.  ft 0.67 


Special  d.  s.  cost  of  gas  per  1,000  cu.  ft .  .  .  .   $2. 17 

Probably  a  standard  price  of  $2.15  and  standard  dividend 
of  10  per  cent  would  be  satisfactory  to  the  company.  Dili- 
gence and  skill  would  be  likely  in  time  to  reduce  the  oper- 
ating cost  of  gas  to  $1.25;  we  would  have 

p— c— am  =2r  =215—125—67  =23 
r  =12c.  reduction 
p — r  =$2.03  price 

r  12 

a  H —  =10  +Q  on  =12  per  cent  dividend  nearly 
m  b.o7 

These  applications  will  serve  to  clear  up  the  practical 
methods  of  applying  this  universal  dividing  scale  to  other 
instances,  given  above. 

The  writer  particularly  wishes  to  state  right  here  that  the 
figures  used  in  these  examples  are  merely  those  suggested 


PRACTICAL    RATE    MAKING   AND    APPRAISEMENT          267 

by  the  above  average  results,  and  are  not  to  be  regarded  as 
having  his  final  indorsement. 

If  any  particular  inferences  can  be  drawn  from  his  ex- 
plorations in  this  new  field  of  gas  finances  they  are  the 
following : 

The  case  of  each  gas  company  must  be  treated  separately 
if  brought  under  the  dividing  scale. 

Experts  of  incorruptible  integrity,  practically  learned  in 
the  theory  and  practice  of  the  business  considered  are  the 
only  persons  who  should  be  permitted  to  discuss  the  figures 
or  present  the  results  of  a  technical  investigation  of  public 
utilities. 

Inexpert  legislators  and  inexpert  courts  or  commissions, 
have  always  erred  in  their  decisions,  usually  in  favor  of  the 
larger  corporations,  at  the  cost  of  the  people,  and  in  the 
case  of  the  smaller  corporations,  unjustly  oppressing  them 
with  impossibly  low  prices.  If  honest,  partisan  commissions 
are  easily  influenced  and  dangerous,  because  the  evil  results 
of  blunders  are  as  serious  as  those  of  crimes. 

Engineers  of  gas  companies  can  add  largely  to  their  divid- 
ing scale  dividends  by  reducing  the  cost  of  gas  and  increasing 
its  sales. 

They  can  also  add  to  the  dividing  scale  dividends  by 
keeping  down  the  capital  expenditure  and  its  capitalization. 

The  limited  use  of  preference  securities  at  low  rates  of 
interest  also  adds  to  the  dividing  scale  dividends  by  reducing 
the  capitalization  per  1,000  cu.  ft.  sales. 

Finally  the  dividing  scale  and  publicity  will  prevent  stock 
watering  by  adventurers  and  the  various  existing  forms  of 
corporate  extortion  and  rascality  resulting  from  it,  because 
it  will  be  to  the  company's  interest  to  have  as  little  capital 


268          PRACTICAL    RATE    MAKING    AND    APPRAISEMENT 

and  as  high  dividends  as  possible,  and  in  order  to  reach  this 
result  it  must  lower  the  price  of  gas. 

It  protects  the  company  from  serious  losses  by  allowing 
the  raising  of  the  prices  of  gas  above  the  standard  price, 
with  a  corresponding  lowering  of  dividend  to  cover  any 
increased  cost  of  gas  due  to  scarcity  of  raw  material  and 
productive  labor. 

COMPUTATION  RULES  FOR  MARKS'  DIVIDING  SCALE  FOR  GAS. 

(1)  To  compute  the  divisible  surplus  saving  per  1,000  cu.  ft. 
of  gas  sales. 

From  the  standard  price,  subtract  the  cost  and  the  stan- 
dard dividend  per  1,000  cu.  ft.  sold. 

(2)  To  compute  the  required  reduction  in  price  per  1,000 
cu.  ft.  sales. 

Divide  the  divisible  su'rplus  saving  by  two. 

(3)  To  compute  the  per  cent  increment  of  the  dividing  scale 
dividend  for  each  one  cent  reduction  in  price. 

Divide  unity  by  the  capital  required  by  one  1,000  cu.  ft. 
annual  sales  to  obtain  the  fraction  of  one  per  cent  required. 

(4)  To  compute  the  dividing  scale  dividend  per  cent. 

Add  the  standard  dividend  to  the  product  of  the  reduction 
in  price  by  the  increment  for  1  cent. 

The  accountant  desiring  to  compute  the  dividing  scale 
rule  in  gross  quantities  may  proceed  as  follows: 

Multiply  the  total  annual  sales  by  the  standard  price  fixed. 

From  this  result  subtract  the  following  quantity. 

(1)  The  total  operating  cost  of  gas  making  plus. 

(2)  The  total  preferred  interest  charges  plus. 

(3)  The  total  standard  dividend  charge  on  dividing  scale 
stock. 


PRACTICAL    RATE    MAKING    AND    APPRAISEMENT          269 

The  result  will  be  the  total  divisible  surplus  saving. 

This  divided  by  2  will  enable  the  fixing  of  the  reduction 
in  price  per  1,000  cu.  ft.  sales,  and  the  dividing  scale  incre- 
ment of  dividends. 


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